By: Ted Dabrowski and John Klingner

Illinois’ battered finances took a hit of sorts recently when an appeals court ruling allowed a challenge to the validity of $14 billion in outstanding Illinois general obligation bonds to continue. John Tillman, CEO of the Illinois Policy Institute, is the plaintiff in the lawsuit that seeks to block the repayment of billions of dollars that remain outstanding on the bonds. 

What’s being litigated is whether the bonds conflict with Illinois’ constitutional requirement that general obligation bonds be issued only for “specific purposes.” If the lawsuit is successful, it could hurt Illinois’ ability to borrow its way out of the current crisis. But even if it fails, the fact that it’s moving forward could cause problems for the state.

In question are the $10 billion in bonds issued in 2003 to fund a portion of the state’s pension shortfall and another $6 billion issued in 2017 to pay down some of Illinois’ unpaid bills. For details on the lawsuit, read Wirepoints’ analysis:

Moody’s Investors Services commented on the recent court ruling, saying the news is credit negative. Their comment does not imply a downgrade, just that everything else equal, the resumption of the suit is a negative for Illinois’ finances: “The ruling is credit negative because it prolongs a legal challenge that, while unlikely to prevail, carries severe risk and could limit the government’s financial options at a time when the coronavirus pandemic is weighing on revenue.”

That’s a problem considering Gov. J.B. Pritzker plans a $1.3 billion bond issuance if his progressive tax hike referendum fails.

Moody’s further warned: “The existence of litigation against the backlog bonds would likely keep the state from using this option [the $1.3 billion bond] even if voters in November defeat a proposal to allow the state to raise revenue by imposing a progressive income tax.”

The second and larger problem is that lawmakers plan to borrow $5 billion to “balance” the 2021 budget, officially projected to be more than $6 billion in the hole. We covered the budget release and that deficit here.

The $5 billion will come from a three-year loan under the Federal Reserve’s new Municipal Liquidity Facility, a new program that provides loans to governments negatively impacted by the coronavirus. Pritzker’s expectation is that the HEROES act will give Illinois enough federal aid to immediately pay down the $5 billion MLF loan.

But Congress has just recessed with no assurance that a package for state and cities will be passed. If aid never materializes, then Illinois will be stuck with the short-term $5 billion loan and no easy way to repay it.

The situation is even more complicated because if the lawsuit is successful, the $5 billion borrowing would be constitutionally limited to one year (see Appendix, Subsections (c) and (d) of Article 9, Section 9). Rolling over such large amounts of debt for one-year periods would create liquidity issues the state can ill afford.

The big three ratings agencies already rate Illinois’ credit one notch above junk. One more downgrade and Illinois will be in unprecedented financial territory. No state has ever been rated junk before.

That’s a major reason why Illinois’ options are so limited. Earlier this year Illinois had to abandon the financial markets and borrow $1.2 billion from the Fed’s MLF. So far, Illinois is the only municipal government in the country to have tapped the MLF.

As we’ve stated before, we don’t expect the lawsuit to ultimately succeed – see our reasons why here – but it’s worth keeping an eye on. 

 

 

Read more from Wirepoints on Illinois’ financial crisis:

Appendix

From Article IX of the Illinois Constitution:

SECTION 9. STATE DEBT

(a)  No State debt shall be incurred except as provided in this Section. For the purpose of this Section, “State debt” means bonds or other evidences of indebtedness which are secured by the full faith and credit of the State or are required to be repaid, directly or indirectly, from tax revenue and which are incurred by the State, any department, authority, public corporation or quasi-public corporation of the State, any State college or university, or any other public agency created by the State, but not by units of local government, or school districts.

(b)  State debt for specific purposes may be incurred or the payment of State or other debt guaranteed in such amounts as may be provided either in a law passed by the vote of three-fifths of the members elected to each house of the General Assembly or in a law approved by a majority of the electors voting on the question at the next general election following passage. Any law providing for the incurring or guaranteeing of debt shall set forth the specific purposes and the manner of repayment.

(c)  State debt in anticipation of revenues to be collected in a fiscal year may be incurred by law in an amount not exceeding 5% of the State’s appropriations for that fiscal year. Such debt shall be retired from the revenues realized in that fiscal year.

(d)  State debt may be incurred by law in an amount not exceeding 15% of the State’s appropriations for that fiscal year to meet deficits caused by emergencies or failures of revenue. Such law shall provide that the debt be repaid within one year of the date it is incurred.

(e)  State debt may be incurred by law to refund outstanding State debt if the refunding debt matures within the term of the outstanding State debt.

(f)  The State, departments, authorities, public corporations and quasi-public corporations of the State, the State colleges and universities and other public agencies created by the State, may issue bonds or other evidences of indebtedness which are not secured by the full faith and credit or tax revenue of the State nor required to be repaid, directly or indirectly, from tax revenue, for such purposes and in such amounts as may be authorized by law. (Source: Illinois Constitution.)

29 Comments
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Aaron
3 months ago

Let’s be honest, no sensible lender would give Illinois money.

MikeInMadison
3 months ago
Reply to  Aaron

fortunately the federal government is not sensible…

Riverbender
3 months ago

The rating agencies refuse to drop Illinois Debt rating to junk as it really should be. There are an assortment of reasons for this that are too numerous to mention here but have been described in prior posts before. Suffice it to say though that the end of the day result is the ratings agencies are in bed with the Illinois politicians on this one; they are as bad as or worse than the politicians.

Susan
3 months ago

Illinois insistence on the sanctity of publc employees’ contracts may, ironically, provide salvation to taxpayers.

A popular tactic used to escape crushing debt burdens is to devalue fiat currency, through hyperinflation.

America is currently experiencing significant inflation. If we experience a similar rising trajectory in coming years, and 3% COLAs are maintained at 3% due to sanctity of contracts argument, pension entitlements may be paid down with cheap devalued currency.

The Truth Hurts
3 months ago
Reply to  Susan

You are correct that hyperinflation would reduce the burden of the 3% increase to pensions. It’s one of the reasons that the state of Illinois decided on a fixed 3% each year. In 1990, when the increase was added, the rate of inflation was 5.4%. The 80’s had several years of massive inflation and giving 3% fixed seemed like a way for the state to offer help to pensioners while at the same time fixing costs. Since we have had relatively low inflation since those times the 3% annual pension increase looks excessive. Liz Bauer wrote about this (not a… Read more »

Last edited 3 months ago by The Truth Hurts
Poor Taxpayer
3 months ago

Illinois is a Goner, DOA. No hope.
The enemy of Illinois is the government worker.
Cops, Teachers, and Firemen have destroyed the quality of life for the honest hard working taxpayer and his family. The children have zero opportunities today. Business are leaving at a increasing rate. Taxes are going way, way up.
Leave ASAP and enjoy your life somewhere else.
Kiss Illinois good bye, best day of your life.
Illinois “Land of Slavery”

Mick the Tick
3 months ago
Reply to  Poor Taxpayer

I agree with your main point and you are consistent…perhaps just too predictable.

Riverbender
3 months ago
Reply to  Poor Taxpayer

I would add the members of the free stuff army to your list. They are important voters that support the government workers candidates on election day.

Dave
3 months ago

You don’t really think the democrats give a hoot about the top state law, the Illinois constitution. They have ignored the balanced budget amendment for years!  Liberals are ideologically driven and have no love for the law. They are unconcerned with whether their desires for government action are legal. Their basis for what is right or wrong is how strongly they ‘feel’ about it. If they think something ought to be this way or that, then they don’t care what the Constitution says or the reasons it was written that way.

daves
3 months ago

Borrowing Billions more, when the state of IL is too far gone and in debt beyond the ability to repay, is just re-arranging the chairs on the SS Titanic…this is a fool’s game when there is a $ 6 billion dollar hole in the “budget” and it will not end well at all for Illinois, or the pensioners who are likely to see ten cents on the dollar when this collapses.

MikeInMadison
3 months ago

I have said this for years: the growth in pension debt by the state of IL falls outside what is allowed by the state constitution and thus is at risk of cancellation / recalibration.

Mike
3 months ago
Reply to  MikeInMadison

You are referring to which sentence(s) in the Illinois state constitution.

daves
3 months ago
Reply to  Mike

the Illinois state constitution says that no pension or benefit can be impaired so actually we are screwed until the constitution is amended, which the Dems will never do. but they are willing to amend it to raise taxes as they see fit. we are doomed. the state of ILLINOIS will declare bankruptcy its just a matter of when.

Aaron
3 months ago
Reply to  daves

The constitution also states that the budget must be balanced. The federal constitution says that the right to bear arms shall not be infringed. They can ignore the pension obligations just as easily.

The Truth Hurts
3 months ago
Reply to  Aaron

The Illinois Supreme Court disagrees with you.

Aaron
3 months ago

That proves my point

daves
3 months ago
Reply to  Aaron

unforunately they can ignore what they dont like…they can balance the budget, just by cutting services to zero. pensions already consume 30% of the revenue of ILLINOIS so we are well on the way down that road. but I do not disagree with you.

Aaron
3 months ago
Reply to  daves

Daves,
its not that the dems ignore, it’s that they fabricate and invent a reality that is not actually real. Total insanity

Last edited 3 months ago by Aaron
Mike
3 months ago

No Moody’s rating for the State of Illinois since 1/1/18?

3 months ago
Reply to  Mike

No new ratings, though some comments since then – some “improvements” and then later some warnings. What is significant is that both S&P and Fitch more recently joined Moody’s at putting the state at just one notch above junk.

Mike
3 months ago
Reply to  Ted Dabrowski

Prior to the streak being broken in 2018, Moody”s had a new ratings analysis for the State of Illinois every two years going back to at least 1990?

Mike
3 months ago
Reply to  Mike

?

daves
3 months ago
Reply to  Ted Dabrowski

State of IL deserves junk status this state is financially destroyed. the best we can hope for is bankruptcy before the damage is too intense to repair, we will be detroit at worse case. Unfortunately I don’t see this ending well for pensioners or taxpayers. get ready for higher and higher taxes. until the fleeing citizens finally push us off the financial cliff.

Mike Williams
3 months ago

In other words, Illinois is getting increasingly desperate as it becomes more difficult to mask the mess of it’s own making. Time is running out for the unfortunate that still remain. Many people put off decisions because of fear. Finally, one day, the choice is made for them when they suffer a serious health issue. They then regret not facing their fears when they had the chance. At some point each Illinois resident will no longer have the option to escape the state. A health issue will occur because we are all mortal. It will make leaving the state impossible… Read more »

Mick the Tick
3 months ago
Reply to  Mike Williams

Illinois is not good for your health. It causes stress unlike most other states. Even if you can handle the taxes, it’s still upsetting because you know the state is basically stealing from you and giving your money to some public union employee that makes more than you for less work. The stress comes from not being able to do anything about it except leave.  

dom
3 months ago
Reply to  Mick the Tick

2018 we left the burning dumpster fire.It is so much better with out the dem leaching on your money.

Mike Williams
3 months ago
Reply to  dom

Leaving Illinois is like finally getting out of a bad relationship. Congrats on a wise decision dom.

daves
3 months ago
Reply to  Mike Williams

for some of us who still have children in high school, we grin and bear it and allow our children to get out of high school …but once that happens there is no reason to stay any longer and we will move since this corrupt mess will not get fixed.

Mike Williams
3 months ago
Reply to  daves

In the meantime, I suggest getting all your ducks in a row so the second your children graduate, you can get out. Best of luck.