By: Ted Dabrowski and John Klingner
For ordinary residents, the costs of being one of the nation’s worst-run states are many. Illinois is the country’s best example of how those costs bear out, though a few other states like New Jersey and Connecticut come in close second.
Illinoisans are burdened with some of the highest taxes in the country – including the highest property taxes – as a result of paying for the nation’s biggest pension debts. Illinoisans’ home values have suffered one of the nation’s worst declines. And residents are being stuck with ever-larger tax bills as more and more people flee. Since 2010, Illinois’ population has fallen by 170,000 people – more than any other state.
But if you’re looking for a more tangible example of how Illinois’ deadbeat status impacts ordinary residents, think of the mess like a mortgage. The worse your credit score, the higher your interest rate. It’s that simple. When your credit score gets really ugly, your interest costs skyrocket, eating into your ability to pay for other key things, like groceries, car payments and education.
It’s the same thing with states. States with the best credit scores – rated AAA by credit rating agencies like Moody’s – pay far less to borrow, leaving more money for core services. The best-rated states include our next door neighbors Missouri, Indiana and Iowa and also states like Georgia.
Take the recent case of Georgia, for example. The state just borrowed $1.1 billion at an average cost of 1.5 percent for a mix of borrowings between 5 and 20 years. That interest rate was the lowest ever for the state, a combination of low overall interest rates and Georgia’s perfect credit.
Compare that to Illinois, which has the nation’s worst credit rating when it comes to states. The state’s rating sits just above junk, a level no state has ever fallen to. (See below for each state’s ratings.)
Illinois’ problems forced it to borrow $1.2 billion from the Federal Reserve in June, after the state abandoned its attempts to borrow directly from the financial markets. To date, Illinois is the only state to tap the Fed’s borrowing program, meant to be a last resort for states. All other states continue to successfully borrow from the markets.
Prior to that, Illinois did manage to borrow $800 million from the markets in May, but it had to pay an exorbitant price for the money – far higher than any other state in the country. The state borrowed at an interest rate of 5.65 percent, four percentage points higher than Georgia (5.65 percent vs. 1.5 percent).
That will cost Illinoisans an extra $330 million compared to what it cost Georgians, assuming an average life of 10 years for the bonds. And that’s just for $800 million. Illinois pays a penalty every single time it borrows, meaning less money for education, health care and roads.
At a time when interest rates are at record lows, when federal money is flowing like water, when other states are paying rock bottom prices – Illinois is paying the highest penalty rates ever. It’s something to remember when Illinois politicians promote the next tax hike.
Hiking taxes isn’t the solution to being the financial deadbeat. Getting your costs under control is.
Read more about Illinois fiscal crisis:
- More reasons why Illinois’ credit rating is circling junk: Bond lawsuits and Fed borrowing
- Mayor Lightfoot doesn’t get it. A broke Chicago can’t ‘eliminate inequalities’ or ‘expand opportunities.’
- Illinois homeowners beware, COVID-19 means even higher property taxes
- Mismanaged Illinois becomes first state to borrow from new Federal Reserve facility