To Pay Its Bills, Illinois to Issue Even More Debt
While not as extreme as taking out a new credit card to help pay for your mortgage, the fiscal situation in Illinois is one which continues to boggle the mind.
On Thursday, as part of its attempt to dig out of a mountain of unpaid bills, Governor Bruce Rauner (R) announced plans to begin a $6 billion government bond sale. The money raised from the bonds will be used to chip away at the $14 billion in IOUs the state has accumulated during a nearly two-year budget stalemate between Rauner and his Democratic-controlled state legislature.
Both types of debt will eventually need to be paid back.
Republican Gov. Bruce Rauner announced plans Thursday to borrow $6 billion to work on paying down Illinois’ massive backlog of unpaid bills, but he warned that he’ll try to trim state spending in order to pay for the new debt costs.
Rauner initially resisted taking advantage, contending that there wasn’t money included in the budget to make payments on new debt. Democrats dispute that, saying $350 million was set aside for that purpose.
Democrats tried to raise pressure on the governor this week, pointing to a late-August report that estimated that the state could save as much as $6 billion by selling bonds to pay down a portion of its about $14 billion backlog of bills. The report by the Commission on Government Forecasting and Accountability also estimated that the state is paying $2 million in additional costs per day on the portion of those bills that are accruing interest.
Illinois’ current credit rating; which is somewhere just above “Junk Bond” status, means the state will have a hard go trying to refinancing its existing debt via the bond market. The two-year budget stalemate ended in July when the state legislature overrode Rauner’s veto of a budget passed by the Democratic majority. Nonetheless, he remains committed to holding the line on spending.
“Illinois has been deficit spending for many years, resulting in a huge unpaid bill backlog. The state has been, in effect, borrowing from local service providers, including nonprofits and small businesses, because it takes months for them to get paid,” Gov. Rauner said. “My preferred solution has always been for state government to reform its spending, and for a strong, competitive economy to grow family incomes faster than the cost of government.
“Unfortunately, the General Assembly passed a tax hike and an out-of-balance budget over my veto. Even with a permanent income tax increase costing the average Illinois household more than $1,000 a year, the budget is more than $1 billion out of balance and is still growing the unpaid backlog. We’re choosing to exercise borrowing authority because it’s better to have Wall Street carry our debt than Main Street Illinois.”
Much of Illinois’ debt is subject to a 12 percent interest rate annually. This can be refinanced to a lower rate by the state; but with its current debt rating, there’s obvious concerns about how many buyers will be out there to buy the newly available bonds.
In the meantime, Rauner’s office believes this $6 billion in bonds can be paid off in 12 years with annual payments of around $500 million plus interest. Rauner believes he can help find more money through reforms and cost savings. He hopes to accomplish that later this fall and has asked for the Illinois state legislature to return to session to work injunction with him in a bipartisan fashion.
“Illinois cannot afford to repeat the mistakes of the past,” Gov. Rauner said. “We have to work together to truly balance the budget. We must protect residents from further tax hikes while ensuring the most vulnerable receive the services they need. Building upon the success of the recent bipartisan education funding law, we can find common ground for real solutions.”
However; given the past budget fights, it hard to see how real solutions are reached until both Illinois Republicans and Democrats get serious about the dire fiscal straits their state is in.
At the heart of Illinois’s budget problems are out of control public employee costs – especially promised state pension costs, where unfunded liabilities now total over $250 billion – which have wrecked havoc on the state’s fiscal picture. Recent numbers from Bloomberg in June showed that Illinois currently has only 35.6 percent of its state futures pension costs fully-funded.
Also an issue is people are fleeing Illinois in droves, which is eroding the tax base. Property taxes have risen so greatly, its caused the state to continually top the list of “Most Emigrated Away From” state in Midwest, losing over three times as many residents per 1,000 when compared to neighboring states like Michigan (3.2), Ohio (3.8), Wisconsin (4.1), Indiana (4.9), and Iowa (8.2).
By comparison, while late, Wisconsin’s most recent fiscal budget appears to be in balance according to the latest revenue estimates and tax collection figures from the Wisconsin Legislative Fiscal Bureau. Additionally, the Badger State’s 2011 “Act 10” reforms have helped keep public employee costs under control for both local municipalities and state bureaucracies. Six years after their implementation, they’ve achieved savings of over $5 billion and counting; likewise, Wisconsin’s state pension fund has been fully consistently funded since 2003.
This has all been noticed by the business community, where Wisconsin now ranks 10th in Chief Executive magazine’s “Best and Worst States to do Business In” list. At the same time, Illinois was ranked 48th.
If the last decade has shown anything, it’s that Wisconsin and Illinois have been on opposite tracks towards on the road to state fiscal health. One has reformed its way to fiscal sanity, the other keeps inching closer and closer off the cliff towards the fiscal abyss.