The State Of Illinois Is "Past The Point Of No Return"
by Tyler Durden
Oct 18, 2017 5:42 PM
Authored by Carl Dincesen via StockBoardAsset.com,
Summary
Summary
- Unless used for capital improvements, any new Illinois State borrowing, regardless of security structure, will amount to nothing more than kicking the can further down the road.
- Markets remain open to uncreditworthy government borrows longer than they should. In a low interest rate environment, investors will stretch credit standards.
- Benchmark bond ratings are at variance with the rating agencies.
Everyone knows Illinois’ financial condition is poor. Conventional thinking seems to be that a bond default, should that happen, would be many years in the future. Pardon me, but wasn’t that the thinking right up to Puerto Rico’s, “We can’t pay” announcement?
To answer the question of just how badly off is
Illinois, I assembled a list of key creditworthiness indicators and
applied them to New York, a highly rated state, and Illinois.
Commentary and Benchmark Private Bond Ratings
The State of New York is managing its financial
resources and obligations in a better-than-average manner. Particularly,
the State’s employee pensions are reported to be 90% funded, but the
general fund deficit must be contained and then eliminated. Unfunded
OPEB costs are too high and can be renegotiated. Funded and pro forma
unfunded long-term contractual obligations equaled 23% of general fund
revenue in FY ended June 30, 2017, and exceeds the 15% threshold for a
Benchmark AA or AA+ credit rating.
*Both NYS income tax and sales tax bonds are payable from annual general fund appropriation. For additional information, click here.
Commentary and Benchmark Private Bond Ratings
The State of Illinois, in my opinion, is
past the point of no return. It does not have the ability to raise taxes
or cut spending to the degree necessary to reduce the annual cost of
bond and retiree benefits from 33% to a sustainable level. The amount of
debt issued by Illinois requires a moderate 8% of general fund revenues
to pay P&I.
The insolvency is not the result of too much bonded debt, but rather the government promising retirement and other post-employment benefits that aren’t affordable.
Bear in mind that direct debt of the State is exempt
from any form of bankruptcy. Most believe that the State’s pension
benefit obligations are on parity with states’ general obligation bonds
and bankruptcy-exempt as well.
Let’s assume the State did find itself in a “no money to
pay everyone” position and chose bond default as the relief value over
failing to appropriate sufficient funds for pension funding and OEB
costs.
Since neither GO bond holders nor pension fund creditors
are subject to any bankruptcy court, who would win? Together they would
be by far the State’s largest long-term contractual obligors. I think
the State’s GOB investors would come out ahead because the State would
not be able to borrow in its own name until it makes good on past due GO
P&I.
Retired public employees might understand
that it is better to negotiate a fair agreement than to demand one the
employer can’t afford. This is the only scenario, however unlikely,
where Illinois stands a change of pulling itself out of its deep
financial hole.
Benchmark and rating agency ratings
Comments:
What?! The government promising benefits that aren't affordable?! Nah... couldn't be.
Sweet- sounds like they're talking about renegging on promises- only way to resolve it.
Can't wait for THIS chimp-out.....
Can't wait for THIS chimp-out.....
Crashing government pension funds.... it just never gets old.
Which is good because we've got TWENTY YEARS of this shit to look
forward to. Over and over, one after the other, like dominoes they're
going to go down.
Late 40s here. Counting on zero government pension. If I do get
something it will be wiped out by health care (insurance) I am sure.
Or, massive tax increase as mentioned below. Or, both!
If Illinois does this, then everyone will do this -- It will be chaos!!!!
It’s called a bail-in. Will be mandatory. That and endless Fed
cont+print. It’s a big shit sandwich and they will make everybody take a
bite.
Everything is past the point of no return. Why would I care about Illinois?
