Vice President of Policy
Public Policy Research Assistant
The price of Illinois bad behavior continues to go up.
With nearly $10 billion in unpaid bills, the nations worst-funded pension system and chronic malgovernance, the state already has earned the lowest credit rating in the nation and fraud charges from the Securities and Exchange Commission.
But if that werent enough, the state, and by extension taxpayers, are now on the hook for higher debt costs.
Just like an irresponsible consumer who continues to spend but disregards his credit score, Illinois is being forced to pay the highest penalty rate in the country nearly triple what California pays.
When Illinois borrows, investors look to the countrys best-rated states those rated AAA by the rating agencies to set their benchmark rate. They then mark up that rate to factor in the riskiness of lending to Illinois. As a result, Illinois pays the highest markup of any state about 1.33 percentage points more than what AAA states pay for a 10-year borrowing period.
California, another highly troubled state, pays only half a percentage point more than the AAA states.
Premium over borrowing rates of AAA-rated states
10-year general obligation bonds
Source: Municipal Market Data index Rates
Illinois poor credit rating is the reason the state must pay such a high penalty on its bonds. A credit rating is a catchall for how well a state is being run, and Illinois’ structural deficits, failed governance and poor economic growth all have contributed to the state being granted the lowest credit rating in the nation. Its no surprise, then, that the state must pay higher interest rates in order to attract investors.
And thats exactly what the state had to do to get investors to buy $800 million worth of bonds last week. The state couldnt afford to have another failed bond sale like the one in January, when it had to withdraw its $500 million bond offering after Standard & Poors Ratings Services downgraded the states credit rating.
Amazingly, when former Gov. Rod Blagojevich was in office, Illinois paid just a small premium over what the AAA-rated states paid. But since then, Illinois penalty rate has soared. Investors just dont like the failed policies of Gov. Pat Quinn and the Illinois General Assembly. The state is headed in the wrong direction and thats clearly visible in the states credit ratings and its penalty interest costs.
If Illinois is serious about becoming a leader in economic outlook and job creation, lawmakers must put forward bold solutions, beginning with shifting government worker retirements to defined contribution plans, repealing the 2011 income tax hike and implementing a spending cap tied to the growth of population and inflation.
Otherwise, the credit downgrades will just keep coming and, eventually, no one will even buy the states bonds.