By: Ted Dabrowski and John Klingner
Don’t think just because the state of Illinois can still find investors for Illinois bonds that Illinoisans aren’t paying a hefty penalty for the state’s corruption and malgovernance. The state recently borrowed nearly $1 billion from the bond market and the penalty, while down from its peak last year, is still punitive.
Reuters reported that Illinois’ “borrowing penalty” for the deal – the extra interest rate Illinois pays to borrow money compared to AAA-rated states – was 1.6 percentage points. That means Illinois will be paying a $120 million extra over the life of the bond when compared to AAA-rated states like Indiana, Iowa and Missouri.
And that’s just for $1 billion in borrowing. Illinois has $30.6 billion in general debt still outstanding. Illinois will pay more than $2.6 billion in “borrowing penalties” for that debt over the next 25 years. It’s punishing.
Bad governance means big penalties
Perpetual deficits are just one of the reasons why Illinois – meaning taxpayers – typically pays some of the highest rates when borrowing. The state’s overpromised and collapsing pension plans is another. And its sham budgets is yet another.
Illinois has the worst credit rating in the nation among the 50 states, just one notch above junk according to Moody’s. So lenders charge the state more for when it borrows. That’s left Illinois paying the highest rates in the nation.
How much more does Illinois pay? It’s the difference between the interest rates that AAA-rated states pay vs the rate that Illinois pays.
At its worst point in late 2016/early 2017, Illinois paid 2.75 percentage points more than those AAA-rated states. That’s the difference between Illinois borrowing at, for example, 5 percent vs. the 2.25 percent of other states.
It’s a huge drag on taxpayers. Take the $968 million the state just borrowed. The average life of those bonds is 7.7 years and Illinois will pay 1.6 percentage points more than AAA-rated states. That means Illinois will be paying a $120 million extra because of its bad credit over the life of the bond.
And that’s just for the the most recent bond. Wirepoints has calculated how much Illinois is punished compared to other AAA-rated states when all the state’s general debt is added up.
In all, the state has $30.6 billion outstanding in general obligation bonds, the average life of those bonds is 8.7 years and the penalty spread for the bonds outstanding is approximately 1.0 percentage point, based on bond data in the most recent offering.
Run the numbers and you’ll find that Illinois will pay over $2.6 billion in extra interest costs over the next 25 years when compared to what it would pay if it was like its AAA-rated neighbors.
That’s just wasted money.
If Illinois wasn’t such a fiscal deadbeat, that money could be going to Illinoisans rather than to bondholders. From lower taxes to funding for social services, Illinoisans would be better off.