Welcome to the Senate Republican Press Search.

View Article Details

Print

Illinois: A State In Crisis

Forbes Online

Monday, July 10, 2017  |  Commentary  |  Richard Lehmann , Contributor

Budget--State (8) , Governor (44) , Political Parties (Incld Tea Party) (39a)
The political battle playing out in Illinois at the state level is a national disgrace. Governor Bruce Rauner, a Republican, and the Illinois State Legislature, which is Democratically controlled, haven’t agreed on a state budget for the last two years.

As a result, the state has built up a record $14.9 billion backlog of unpaid bills. This has prompted a lawsuit by Medicaid recipients whose health care is at risk since care givers can only fund so much unpaid care before they too cut back.

Unsaid is that many businesses owed money by the state have of necessity had to shrink their operations and cut expenses due to not being paid, hence economic growth is suffering. The most unfortunate part of this situation is that the citizens of Illinois have come to accept such irresponsible behavior from their officials as they see a similar situation playing out on the national stage.

The long-term consequences of this battle in Illinois are tragic. The state is on the brink of losing its investment grade credit rating, an event that can generate a new crisis since the municipal debt market is key to any resolution of the financial crisis at hand. Barring some dramatic action by voters, it will ultimately be bondholders who force the state into more responsible behavior.

As they see the Puerto Rico debacle play out, the comparisons to Illinois will begin to concern bondholders. In fact, concern is already at hand with 10-year bonds at 4.5% for a yield that is 2.6% above the benchmark for such debt. Losing the investment grade rating limits the number of buyers and results in actual dumping of existing issues by institutions that cannot hold this grade debt. Left unchecked we could see 7% yields on new debt issues, a financial burden that makes Puerto Rico-like outcomes ever more likely.

Change here must come by force through financial distress since there is slim hope it will ever come through the political process. That is the solution being implemented in Puerto Rico and it is the eventual solution for Illinois.

Institutional investors should exercise some adult supervision now or face further erosion of value in the bonds they already hold.