Illinois Credit Rating on Its Way to Junk Status

by Peter Schiff, Schiff Gold:

Illinois’ credit rating is on its way to “junk” status.

According to an AP report, S&P Global Ratings recently warned it will likely lower Illinois’ creditworthiness to below investment grade if feuding lawmakers fail to agree on a state budget for a third straight year.

Analysts say this is bad news for Illinois residents. Chicago-based Performance Trust Capital Partners director Brian Battle said the prospect of a junk rating should alarm everyone.

It isn’t a political show. Everyone in Illinois has a stake in what’s happening here. One day everybody will wake up and say ‘What happened? Why are my taxes going up so much?’”

Analysts say the lower credit rating could cost the state “tens of millions” of dollars the next time it sells bonds.

The more money the state has to pay on interest, the less that’s available for things such as schools, state parks, social services and fixing roads.”

Illinois’ credit rating has been on a downward trajectory for years. The state is a financial mess. It has a $15 billion backlog of unpaid bills. Revenue also fell after lawmakers allowed a temporary income tax increase to expire in 2015. But the biggest millstone around the state’s neck is its pension system. According to a recent article in Forbes, the state’s pension system has a shortfall of at least $130 billion.

The basic process by which states get in such severe financial trouble is well established. Unions get protection from any future diminishing of pension obligations enshrined into state law or, ideally, the state constitution. Then public sector unions give state politicians big campaign contributions in exchange for large, irresponsible future pension benefits. The state legislature then underfunds those pensions, keeping the taxpayers from realizing the full cost of the promised pensions and eliminating any near term pain from the pension promises. Unions don’t object to the underfunding because they know the law protects their pensions no matter how bad the situation gets. Eventually, you are Illinois, with a pension shortfall equal to roughly eighteen months of total state spending.”

If S&P Global Ratings follows through, Illinois would become the first state to have its credit rating downgraded to “junk,” but it probably won’t be the last. In fact, the Land of Lincoln may well be a canary in the coal mine.

A report last year showed that teetering pension systems across the US are not only jeopardizing Americans’ retirement, they are also pulling a number of states down into a black hole with them. The states in the worst financial shape also share the problem of underfunded pensions. Illinois, Connecticut, and Kentucky have less than half of their pension obligations funded.
When you included debts from local programs, the total pension debt in the US eclipses $1 trillion in 2015. The impending collapse of the country’s pension systems is not only turning many Americans’ retirement dreams into nightmares, it’s also jeopardizing the country’s economic stability.

In fact, the extreme debt load in America today is among the underlying economic fundamentals that simply can’t be ignored. Illinois serves as a vivid reminder of the impact of debt – personal, corporate, and national – and the fact that it is a ticking time bomb that is eventually going to explode.

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