The train wreck that is the state of Illinois has generated a lot of questions lately, including “Will its government ever pass a budget?”, “Will it ever pay its overdue bills?”, and “Is it possible for a state to go bankrupt?”
Looks like we’re about to get some answers to these questions, along with one more: “What happens to the financial markets when people finally realize that Illinois is far from the only impending bankruptcy?”
Today’s Wall Street Journal has an anecdote-filled article illustrating what certainly looks like a case of terminal financial mismanagement (How Bad Is the Crisis in Illinois? It Has $14.6 Billion in Unpaid Bills):
Among the many, many data points:
- The state comptroller predicts unpaid bills will soon top $16 billion. “It is almost hard to say those numbers out loud because they seem so insane, but that’s where we are right now.”
- Unfunded pension liabilities now total $250 billion. That’s about one-third of state GDP, and is in addition the myriad other debts taken on in recent years.
- S&P Global Ratings has warned that it could lower the state’s rating to junk as early as this week if a budget isn’t passed.
- Peoria-based OSF Healthcare, a network with 10 Illinois hospitals, is owed about $115 million for bills over four months old, the equivalent of 18 days of operating expenses.
- The state owes Illinois dentists $225 million. Some dentists with lots of state workers are selling receivables to keep the lights on. Others are asking state employees to pay in cash.
- The state owes two Springfield hospital systems more than $200 million.
- The Coliseum building at the state fairgrounds closed indefinitely earlier this year after the state failed to fund needed repairs.
- Eastern Illinois University has received $53 million less in state funding in the past five years than the previous five. Professors in the chemistry department haven’t been able to print in color since the department’s printer ran out of yellow ink a year ago. Enrollment has fallen from 12,000 to 7,000 in the past decade.
- If the state doesn’t pass a budget in the current special legislative session or allocate emergency funding, about 700 road projects under way across the state—worth $2.3 billion and employing 20,000 people—will come to a stop.
- Some social-services agencies are operating without state help while others have closed entirely, leaving some rural communities without mental-health clinics, domestic-violence shelters and drug-treatment clinics, despite a raging opioid crisis.
- Illinois has lost more residents than any other American state for the third year in a row, with 90% of the state’s counties seeing a drop in population, shrinking the state’s tax base. In 2016, a net of 37,508 people left, according to census data, putting the population at its lowest in nearly a decade.
The impending downgrade to junk status might be the final push off the cliff, since Illinois – despite a constitution that kind-of-sort-of requires a balanced budget – still borrows a lot of money each year, mainly to fund its out of control pension system. As a junk-rated borrower, its interest costs will be much higher, making its financial imbalances that much worse. Assuming that anyone will lend money to the state on any terms.
Here’s a chart from CNBC showing how swift the fall from investment-grade has been:
Soon the junk line will be crossed, at which point it will become clear to everyone that the problem is unfixable and one or another doomsday scenario is imminent.