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Illinois' strategy for digging out of debt: taking on more

Carbondale Southern Illinoisan

Friday, July 14, 2017  |  Article  |  AP

Bonds, Bonding, Borrowing, Debt, Credit Rating , Budget--State (8) Trotter, Donne--State Senate, 17

SPRINGFIELD — Illinois lawmakers who recently ended the longest fiscal standoff of any state since the Great Depression are counting on an ironic strategy to dig out of mountains of debt: borrowing even more money.

It's an unorthodox approach considering deficit spending largely created the mess and Illinois' worst-in-the-nation credit rating makes borrowing inordinately expensive. However, supporters say it's the best way to begin to erase $14.6 billion in overdue payments to vendors and service providers.

Bills that are 90 or more days past due incur 12 percent in late-payment fees. By paying off a chunk of that at a time with the sale of bond proceeds, the state could cut that rate in half.

"We are being smothered by our liability and our indebtedness, not only in the state and trying to deal with the budget, but with the people we owe money," said Democratic Sen. Donne Trotter of Chicago, the assistant majority leader who sponsored the measure.

Trotter said it currently takes Illinois about 200 days to pay a bill, but his plan would reduce that to as few as 60 days.

The Democratic-controlled General Assembly endorsed the budget — and a $6 billion borrowing scheme — over Republican Gov. Bruce Rauner's vetoes. However, it's unclear whether Rauner will actually use the borrowing authority given to him. He has said nothing about it in the 10 days since the budget was passed and his spokeswoman, Eleni Demertzis, declined comment Thursday.

It's typically advisable for governments to borrow for long-term construction projects only. But analysts say for Illinois, it's a sound way to get ahead of its crisis instead of letting it fester.

"Illinois' problems are entirely a matter of politics and willingness," said Matt Fabian, a partner at Municipal Market Analytics. "The state has had the ability to fix its budget and remedy its long-term liability. It's just chosen not to for all these years."

Creditors don't object.

"If the state came to me and said, 'We'll pay you all the back pay at one time, but you won't get the (late-payment) interest, I'd be happy with that," said Ken White, owner of Above and Beyond Cleaning Specialists, which maintains several downtown Springfield Capitol complex buildings and is owed up to $200,000.

Bond-rating houses have reacted favorably to Illinois' financial plan, if not to the idea of borrowing specifically. Three major agencies threatened a downgrade of Illinois' creditworthiness to "junk" status without a swift remedy but have published positive messages since the July 6 budget action.

While not unprecedented, borrowing to pay bills is "not a good sign of fiscal stability," said Alan Schankel, municipal bond strategist for Janney Capital Markets. Schankel noted that Connecticut borrowed to bridge a deficit several years ago. But Connecticut's credit rating, like Illinois', is in the tank.

A state such as Georgia, with gold-standard credit, could borrow at about 3.5 percent interest, Fabian said.

Lynnae Kapp, senior revenue and bond analyst for the Commission on Government Forecasting and Accountability, the Illinois Legislature's budget office, said Illinois would be forced to pay as much as $2.5 billion in interest on a $6 billion loan — even if it's paid off quickly.

Historically, debt from a state such as Illinois has been an attractive investment because, with its power to take whatever means necessary to pay off its bills, the state is considered immune from default. Detroit's bankruptcy and Puerto Rico's $70 billion debt-restructuring plan have given the market pause.

"You don't want to finance deficits with borrowing, but sometimes you have to," Schankel said. "The deeper into the hole you get the harder it is to dig out of the hole. ... Illinois has got a lot going for it but the willingness to get things done is hard to see."