Illinois is Broke

Long time readers of this blog know that I reside in the Land of Lincoln.  Illinois now has the distinction of perhaps being in the worst fiscal mess of any state in the Union, as this recent article by Josh Barro for Real Clear Markets indictates:

If you go to Sacramento this week, don’t be surprised to hear champagne corks popping and chants of “We’re #2! We’re #2!” The cause for celebration? Illinois has overtaken California as the worst credit risk among American states.

As of Monday, the credit default swap spread for Illinois general obligation bonds climbed to 313 basis points for a five-year contract — meaning a bondholder must pay over 3% of the bond’s face value per year to be insured against default.

That’s a higher price than for all but seven sovereign entities tracked by CMA, and slightly higher than California, whose five-year CDS spread sits at 293. Investors rate Illinois’s debt as slightly riskier than Iceland’s or Latvia’s, but not quite as big a gamble as Iraq’s.
Despite this environment, Illinois chose to issue an additional $300 million in taxable Build America Bonds last week. Unsurprisingly, the markets were not keen and demanded a high price: the new 25-year bonds were sold with a yield of 7.1%, a spread of 297 basis points over 30-year treasuries. Illinois’ last long term issues, in April, had spreads of 205 and 210 basis points, meaning investors were already nervous about Illinois and are growing moreso.
This issuance provides further evidence that the ratings agencies haven’t fully appreciated the dire nature of state finances, at least in states like California and Illinois. While Illinois carries a Moody’s rating of A1, six notches above junk status, the markets put Illinois’s debt close to the borderline between junk and investment grade.

As my colleague Nicole Gelinas points out, bonds due in 2036 from Anandarko Petroleum (BP’s 25% partner in the Deepwater Horizon rig) were yielding 7.3% at the time of the Illinois issue. That’s only a bit richer than Illinois’s bonds maturing in 2035, yet Anandarko is rated Baa3, five notches below Illinois. Jeffries and Hartford Financial, rated Baa2 and Baa3 respectively, both have issuances due in 2036 that were yielding 7.1%.

What is Illinois doing that has the markets so nervous? A few months back, I explored the issue, noting that Illinois doesn’t face many of the challenges that typify “states in peril.” Unlike California, Illinois cannot blame its budget woes on a particularly volatile revenue system or on outsize exposure to the housing bubble. Illinois’s crisis is unique in that it is purely a creature of mismanagement by elected officials.

Like California, Illinois hasn’t balanced a budget in nearly a decade, and instead uses gimmicks and borrowing to close gaps. Like California, Illinois regularly issues bonds to pay for current government operations. But unlike California, Illinois has some of the country’s least-funded public employee pension plans.

Public employee pensions plans create fiscal challenges for all states, but it’s hard to find one that is coping more poorly than Illinois. Legislators have routinely closed budget gaps by deferring pension payments. (Or sometimes they make the payments by issuing Pension Obligation Bonds, over $13 billion in the last 10 years). In a recent study that I co-authored looking at the funding status of teacher pension plans in the states, Illinois was the second-worst performer; only West Virginia’s pension fund has a lower funding ratio.

Illinois’s pension funding irresponsibility may come home to roost soon. Joshua Rauh, a professor at Northwestern University, estimates that the state’s pension funds will run out of money in 2018 at the current funding pace. He estimates the plans’ total funding gap at $219 billion — a liability that dwarfs the $117 billion in bonds outstanding from the state and localities within it.

Once the reserves run out, Illinois won’t be able to defer its pension costs any longer. Unless it wants to default on pension promises made to retirees over decades (which it is barred from doing by the state constitution) it will have to draw on current tax revenues to pay out current-year benefits — and that need will compete with other state spending and with debt service.

Illinois did enact a pension reform this year, but the reform only applies to newly-hired employees, so it generates only minimal savings in the near-term. Worse, it keeps those new employees on a defined benefit system, only with reduced benefits — leaving open the possibility that legislators will go back and sweeten benefits when the economy looks stronger. (This is a cycle that New York State has been through more than once.) Instead, Illinois should shift to a defined-contribution system for future retirement benefits, at least for new hires.

Recent actions in non-pension areas are even less inspiring. The state legislature recently passed a provisional budget designed to “close” the state’s budget gap, though it does nothing to resolve $6 billion in accrued but unpaid bills to state service providers, like doctors and hospitals providing Medicaid services. Legislators currently have no plan to make the $4 billion payment due into the state’s employee pension funds this year.

The bond markets are screaming that Illinois needs real fiscal reform, and they didn’t find the pension reform to be satisfactory. To calm the bond markets, Illinois must stop using its pension funds as a venue for backdoor borrowing, stop borrowing to pay for current operations, and stop spending more money than it takes in.

The Illinois Policy Institute has been advancing a creative solution to the state’s budget woes. They have proposed a constitutional spending cap, similar to one enacted in Colorado in 1992, that would limit state spending growth to population plus inflation growth.

Go here to read the rest.  How out of touch the powers that be in Illinois are about the fiscal hole that we are in was underlined by the endorsement of Governor Pat Quinn, the Lieutenant Governor who took over from Blagojevich who was too much of a crook even by Illinois standards, by the teacher’s union, the Illinois Education Association, yesterday.  The teacher’s union blasted Republican nominee for governor Bill Brady for having the audacity for proposing that new teacher hires pay for their own retirement!  Quinn has been handing out with a free hand raises to his stop staff while Illinois careens to fiscal disaster.  The message really hasn’t sunk through yet that the State of Illinois is just as broke as anyone who cannot make even the minimum payments on his credit cards and has debt collectors calling at all hours.  Brady has an 11 point lead over Quinn in the latest Rasmussen poll, and I think Brady will probably be the next governor of Illinois.  I do not envy him his task.   The Illinois is Broke website here says it all. 


11 Responses to Illinois is Broke

  1. Elaine Krewer says:

    Very good post and (depressingly) spot-on article there. However, it is my understanding that switching to a defined-contribution retirement plan wouldn’t necessarily save the State as much money as people think because that would require the State to start paying into Social Security for those employees who currently do not receive it, as well as matching those contributions. In other words, skipping payments would no longer be an option.

    The problem really started back in the 1970s when the Illinois Supreme Court stupidly ruled that the constitutional guarantee that pensions were a “contractual” benefit that could never be taken away or diminished applied ONLY to the immediate payments being made to individuals, and NOT to the state’s yearly contribution to the fund. As long as current pensioners kept getting their checks, the state didn’t have to pay into those funds.

  2. Donald R. McClarey says:

    My preference Elaine would be to offer state employment with no pensions to new hires. I think we would have no end of applicants for the jobs. The cost of state employment is only one portion of the fiscal disaster which is Illinois, but it is an important part. Of course this situation will ultimately rectify itself, either by needed fiscal reforms being taken, or the state government simply collapsing and reforms being undertaken in the midst of an extreme crisis. From what I know of Illinois politics, I think the collapse scenario is most likely.

  3. T. Shaw says:

    But! This is impossible. Barracks, Quis Ut deus, is from Illinois!!!

    How could this be?

    Genius liberals have run Illinois even since before 5,000 dead Chicagoans elected JFK. That’s like 50 years!

    Not to worry!

    Obama, Bawney Fwank, and Chris Dodd have the solution! DERIVATIVES!!!!! They’re going to outlaw credit default (derivative) swaps! “Happy days are here again . . . ”

    No wait!! End Wall Street and bankers’ pay packages!!!
    No wait!!! Raise taxes on the evil rich!!!!
    No wait!!!! Take over health care!!!!
    No wait!!!!! Destroy the coal industry!!!
    No wait!!!!!! Cap and tax the cost of gasoline and home heating oil (save the snail darter!) up to $10 a gallon!!!!!
    No wait!!!!!!! Add a VAT!!!!!
    No wait!!!!!!!! Add 15,000,000 people to the public teats and the demagogue voter bloc!!!!

    Enlightened rule, Baby! Saintly social justice, brothers and sisters!

    “You want freedom? You gonna haf’ta kill some crackers. And, they babies . . . ”

    Amen!!! Halleluiah!!!

    You’re finished, stick a fork in yourselves.

    Thanks to all pro-abortion catholics! Thanks for ruining our country!

  4. American Knight says:

    Just another example of government corrupted by those who serve Mammon. Constitutional restraints are designed to severely limit the power of government over the money supply and the people. Once those limits are ignored then there are no limits placed by any system of checks and balances and men who lack virtue will flood the halls of government to engorge themselves on the excess and victimize and enslave the people.

    The problem is and has always been that money, which is the lifeblood of the natural pricing system, should never be arbitrarily manipulated by monopoly power. The Constitution, the supreme law of the land, gives the power to coin money to Congress only. Congress transferred that power to a private monopoly enforced by the coercive (threat of violence and seizure) power of government. The Constitution does not permit Congress to do this and it does not permit Congress to print money either.

    Before anyone goes nuts and accuses me of advocating that we all carry metal around with us – that is not necessary. Congress can print, or use digital tech, money so long as it is backed by a fixed quantity of precious metal. Now I know it doesn’t have to be precious metal; however, that has traditionally been the best medium. Obviously God designed our world with a natural tendency to use precious metal as money. This would limit the ability of Congress to charge all the spending it wills (a potentially infinite desire) to the private bank, which creates the money out of nothing, backed by nothing and at no expense to the bank. This allows them to spend, spend and spend with no need for thrift, prudence or accountability. Obviously the states and commonwealths feed off the same beast.

    If you want them to have restraint and want them to have limited power then we need to cut them off from an endless supply of easy and depreciating money.

    Men of honor, character and virtue will go to government to actually serve the common good, because the temptation to serve themselves or re-engineer society (always an expensive proposition) will be curbed.

    Illinois and California are not doing anything different than Congress, they are merely less noticed by the rest of us (at least those of us who don’t live in those states). Of course, all but four states are in similar trouble to one degree or another, most due to mandatory federal programs. Four states went bankrupt in 1847 because President Polk wouldn’t bail them out. They recovered. California can recover, so can a corrupt cesspool like Illinois – just cut off the free money and watch the rascals run. Then honest men, who will do the right thing can clean up the mess.

    The prohibition against usury, properly understood, is not against interest. Interest is a rent payment for the use of a borrowed asset. The price is set by the actions of borrowers and lenders and the natural market will set it fairly. Usury is the collection of interest on something that has no value,and it usually involves force and violence.

    We are using over two-thirds of current revenue to service debt, which for the most part is fiat money that came at no cost to the Fed. Legitimate bond issues to Americans and foreigners excepted. This is usury, this is immoral and this is one of the things that sparked the wrath of our Lord when He walked the earth. We should listen to Him.

    Oh, one more thing. The consideration of defined-benefit vs. defined contribution. Since government is meant to serve and most government employees need make no significant sacrifice, they should NEVER get either a DB or a DC. Military personnel excepted, all soldiers, sailors, airmen and marines deserve DB pensions. Congressional critters and bureaucrats don’t.

    However, in the private world, those decisions are made by employers, shareholders, owners and employees. I’d recommend the DB, but I would never trust Wall Street or a bank with it.

  5. Elaine Krewer says:

    “Genius liberals have run Illinois ever since before 5,000 dead Chicagoans elected JFK.”

    Not quite. Illinois has not always been a “blue” state. Well into the 1960s and 70s it was a “swing” state whose electoral votes could go to either party. Only in the last 18-20 years has Illinois consistently voted Democratic in presidential elections. The main reason for that (I think) is that the suburban Chicago “collar” counties, which used to be safe GOP territory, are going increasingly Democrat. On the state level Republicans controlled the governor’s mansion for most of the 1950s (after Adlai Stevenson lost his bid for president), for a good chunk of the 1970s, and for all of the ’80s and ’90s.

    As for those dead Chicagoans who allegedly elected JFK, Chicago blogger Tom Roeser has a different take on that: he says that Mayor Daley, Sr.’s real reason for cranking out a huge Democratic vote in 1960 was NOT to elect JFK — that was merely icing on the cake — but to insure the defeat of popular Republican state’s attorney Benjamin Adamowski. Adamowski had vowed to aggressively pursue public corruption cases, and had made no secret of his desire to eventually run against Daley for mayor, so Daley, naturally, regarded him as a mortal threat. Whether this is true or not I don’t know since I wasn’t even born at the time, but it sounds plausible to me.

    More in a few minutes.

  6. Elaine Krewer says:

    “Since government is meant to serve and most government employees need make no significant sacrifice, they should NEVER get either a DB or a DC.”

    Eh, I dunno about that. I may be a bit prejudiced being a state employee myself, but at the professional levels (jobs requiring college or postgraduate degrees, professional licenses or significant skills) state employees often make less, sometimes a lot less, than they could in comparable private sector jobs. Some of them do make considerable financial sacrifices because, believe it or not, they believe in what they do and want to contribute to the public good. On the other hand, for less skilled jobs — custodians, nurses aides, data inputters, etc. — state employees do tend to make more than they would in the private sector.

    As for my situation, I’ll save you the trouble of filing a FOIA request to the Illinois Comptroller and tell you exactly how much I make: $35,000 per year. And that’s after 25 + years total in the workforce, with a bachelor’s degree, 22 of those years in the private sector. My current pay is only slightly higher than what my best private sector job paid. Why did I take this job — well, basically, because it had decent insurance, regular hours, and didn’t require a 60-mile commute every day.

    All that being said, I honestly don’t expect to receive any of my state pension or Social Security seeing as how both funds will probably be broke long before I’m 65. I resigned myself long ago to having to work until I’m too old, sick, or dead to continue. I do have a small annunity fund left over from a former job, but that’s tanked pretty severely in the last few years.

  7. Elaine Krewer says:

    Elaine’s Rant, Final Chapter:

    Given what I said above, I wouldn’t be all that upset if the state abolished DB in favor of DC or just scrapped the whole thing. Most tail-end Baby Boomers and Gen Xers have pretty low expectations regarding retirement anyway so it wouldn’t be much of a shock to them. However, it would be totally unjust to take away benefits already promised to those who earned them fair and square. I also that ELECTED officials should not draw pensions for their service because public office is not supposed to be a lifetime career or source of security anyway.

    “This is usury, this is immoral and this is one of the things that sparked the wrath of our Lord when He walked the earth.”

    Recently I caught a snippet of one of Fr. John Corapi’s talks on EWTN radio, and he suggested a very interesting idea I think it’s worth reflecting upon here: bad leadership is one of the ways God punishes us for our sins. That’s what happened to Old Testament Israel, when they insisted on having earthly kings just like the pagan nations around them did. God, through the prophet Samuel, warned them that they’d live to regret it, but they didn’t listen.

    How many of us have been dreading the prospect of God’s judgment upon our country because of our acceptance of abortion and other evils, and our continuing to elect public officials who countenance these things? Well, I guess it’s already here… not in the form of fire and brimstone, lightning bolts from heaven, locust plagues, etc. but in the form of crumbling infrastructure, fading job prospects, vanishing retirement security, high taxes, etc. I wonder if the embarrassment of Blago and his legacy of fiscal ruin are the way God has chosen to punish Illinois for inflicting the Abortion President upon the nation?

  8. American Knight says:


    The problem is not necessarily with your job, mission or vocation – it is with your employer. The government has little need for actual employees. Most functions of government can and should be performed by other authorities or the natural market. In the areas where government is called to be the provider of a particular need, then it can usually contract that out. Some instances this is not the case as in the military, although, some private military has been effective, Executive Outcomes comes to mind.

    I don’t know what your particular job is and I don’t care to comment about you personally on here so I suggest you refrain from telling me. It is likely that your job can be performed by you better and probably with better compensation if it was private. Just because it is private does not mean it is selfish – many private jobs provide for the common good. For example some of the teachers in Catholic schools make much less than their government school counterparts and they generally do a better job – although I’d rather see sisters and nuns doing the job. Also note that private charities do a better job, more efficiently and with far less corruption than say, the United Way or the Red Cross.

    Is private better than government? Generally yes. It isn’t that abuse won’t occur – as long as people are involved there will always be abuse, the difference is that it isn’t codified, perpetuated and encouraged. That tends to happen when government is involved – the temptation is too strong for most.

    In any event, the issue of savings regarding the government jobs, and for that matter private jobs, is that it is incumbent upon the worker. Relying on the employer is rarely a good idea. The problem is the government channels funds to certain savings vehicles at the expense of others for the benefit of certain companies and the detriment of others. If they left it alone and didn’t depreciate the currency, then everyone of us could save for retirement (whatever that is) ourselves with great success.

    Of course, we are in this situation for the reasons you and Fr. Corapi pointed out, what I find sad is that we needed our bank accounts, pensions and home equity hit before we actually paid attention. We need to remember what we’ve been taught about serving two masters.

    In any event work is not given to us to earn money, although I admit that I do like that part, work is a gift given to us for our sanctity. So if we have to work until we drop dead, assuming we work well and to the good, then I suppose it is time-off in Purgatory. At least I hope so. 😉

  9. Elaine Krewer says:

    “Usury is the collection of interest on something that has no value, and it usually involves force and violence.”

    This may explain why Dante, in the Inferno, placed usurers in the same circle of Hell as sodomites and blasphemers — he regarded these offenses as acts of violence against God (blasphemy), against nature (sodomy), and against art (usury), the “child” of nature and thereby the “grandchild” of God. “Art” as Dante defined it meant human labor of any kind, and he believed usury subverted the will of God that man should earn a living through honest work. (That whole topic could be fodder for another post 🙂

  10. afl says:

    If you think this is sad, this can be omen of what the minions of Illinois ruuning the Adminstration have been doing in the White House along with the Senators and Representatives. If the national spending continues, especially with cap and trade and the health bill kicking in, and billion dollar loans to Brazil company for deep water drilling ( only they banned it in US or are trying be fore court stepped in ) and over 99 weeks of extended unemployment benefits ) and older workers taking Social Security earlier because they cn not find work the video could say the USA with interest on our debt at over one trillion and climbing is BROKE and can not meet their interest payments or social security and medicare payments.

  11. Elaine Krewer says:

    Recently the bishops of Nigeria endorsed a campaign of public prayer against corruption and composed the following prayer to be said at public liturgies. With just a few tweaks it would fit right into the Land of Lincoln:

    “Father in heaven, You always provide for all your creatures, so that all may live as you have willed. You have blessed our country of Nigeria (State of Illinois) with rich human and natural recourses to be used in honour and glory and for the well being of every Nigerian (Illinoisan).

    “We are deeply sorry for the wrong use of these your gifts and blessings through acts of injustice, bribery and corruption, as a result of which many of our people are hungry, sick, ignorant, and defenceless. Father, you alone can heal us and our nation (state) of this sickness.

    “We beg you, touch our lives and the lives of our leaders and people so that we may all realise the evil of bribery and corruption and work hard to eliminate it. Raise up for us God-fearing people and leaders who care for us and who will lead us in the path of peace, prosperity and progress. We ask this through Jesus Christ our Lord. Amen. Most Sacred Heart of Jesus, Have mercy on us.”

    The one major rewrite I would suggest in an Illinois version of this prayer would be to change “many of our people are hungry, sick, ignorant and defenceless” to “many of our people are without needed services and unable to support their families.”

    I think just about anyone would agree that the poor leadership in Illinois has had that effect — whether you are liberal and think the problem is social services not being adequately funded, or you are conservative and think the problem is overtaxation, bloated public payrolls, and other factors that discourage or drive away private employers. Either way, we need help.

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