Illinois is one week away from going where no state has ever gone — into the ignominy of “junk bond” status.
Unless Gov. Bruce Rauner and the General Assembly put a budget in place by June 30, and a properly balanced budget to boot, Wall Street ratings agencies are expected to rapidly downgrade the state’s credit to junk territory.
That distinction will cost everyone from Zion to Cairo, although, if coupled with another failure to fix how we fund education, the negative fallout will likely be felt nowhere more than in Chicago, with our already financially teetering school system.
With junk-rated Chicago Public Schools now paying the state’s legal maximum of 9 percent interest on a portion of the borrowing it has relied on to keep the doors open, the school system’s options for further fiscal juggling keep shrinking.
Sadly, that’s always been what this fight was about: whether Rauner could leverage the worsening financial problems of the city’s schools to win political concessions from the Democrats who control the Legislature before the state’s own problems caught up with him.
The resulting impasse has wreaked havoc on the state’s universities and social service delivery system. But, as bad as things have been, they’re on the verge of getting even worse.
Why should a junk bond rating for the state matter to John Q. Public?
State Treasurer Michael Frerichs explained in a statement earlier this month.
“The state’s credit rating is much like your personal credit rating,” Frerichs wrote. “Illinois families understand that when your credit rating drops, it is more difficult to secure a mortgage or car loan.
“If you do obtain a loan, you pay higher interest rates because the financial institution views you as a risk,” he continued. “Illinois is viewed as a risk.”
And an increasingly poor risk, at that.
When the state pays higher interest rates, that’s less money it can use to pay for government services — or to reduce the growing $15 billion backlog of unpaid bills.
There’s also a risk of what Standard & Poor’s has characterized as Illinois “entering a negative credit spiral, where downgraded credit ratings would trigger contingent demands on state liquidity.”
The Rauner administration has taken steps to forestall that costly possibility by renegotiating some of its credit agreements. It will now take a two-stage drop — to the second level of junk status — to trigger a requirement for lump-sum termination payments that would blow another hole in the state’s checkbook.
But if the state embarks on a third year without a real budget, nobody is entirely sure what happens.
In a nod to the importance of state government being able to continue borrowing when necessary, Illinois Comptroller Susana Mendoza has promised that bondholders will be paid faithfully.
As the state’s cash-flow difficulties become more severe, though, keeping that promise could mean a hit to other items the comptroller has treated as untouchable “core priorities,” such as the state payroll or pension contributions.
Until recently, Rauner has been remarkably sanguine about the threats of credit downgrades. The governor likes to say he doesn’t represent the rating agencies, whose interests do not always align with his responsibilities to taxpayers.
Ratings agencies, he notes, are only interested in making sure bondholders are repaid and are only too happy for governments to raise taxes to accomplish that.
There’s some truth in that. But the problem is that lousy credit ratings cost taxpayers, too.
And once credit ratings drop, it can take that much longer to get them moving again in a positive direction.
The state’s falling bond rating, coupled with its long-running structural deficit, are causing problems for governments across Illinois.
“This negative contagion means all cities, counties, school districts and universities throughout the state see lower ratings and higher borrowing costs,” John Miller, managing director of Nuveen Asset Management, told a legislative committee last month.
This so-called “Illinois penalty” is costing those governments an estimated $930 million a year in added debt service, Miller said.
For those of us who remember periods of high interest rates, even a rate as high as the 9 percent CPS is now paying might not seem so bad.
But look at it this way: Financially healthy school districts around the country are paying as little as 1 to 1.25 percent interest for similar borrowing.
That means that, instead of having millions of dollars to pay teachers or to put into classroom support, CPS is stuck using that money to repay interest.
Bruce Rauner took over a struggling state. Now, it’s a “junk” yard.