One week ago, Illinois state comptroller, Susana Mendoza, gave a detailed explanation in her letter to Gov. Rauner and members of the state legislature - two parties that have been locked in a nearly three year long confrontation, preventing them from agreeing on a state budget - explaining why Illinois was on the verge of total collapse.
"The state can no longer function without a responsible and complete budget without severely impacting our core obligations and decimating services to the state's most in-need citizens," Mendoza wrote. "We must put our fiscal house in order. It is already too late. Action is needed now." And unveiling the most dire language yet, in her letter Mendoza said "we are now reaching a new phase of crisis" perhaps in an attempt to prompt the Democrats and Republicans to sit down and come up with a compromise
Since then, despite all parties' "best efforts" (actually, there have been no real efforts whatsoever) to reach a compromise after two years of failures, nothing has really changed, with the only difference that Illinois is now just three days away from financial armageddon, because come July 1 and the state has no budget for its third fiscal year, a downgrade of the state to junk - for the first time in US history - is assured, unleashing interest rate hell for future debt issues, and ultimately, bankruptcy.
Those are not our words, but those of Ted Dabrowski, vice president of policy at the Illinois Policy Institute, who said that the Illinois budget crisis has become so dire that the state is in danger of entering a financial "death spiral," as a result of the imminent downgrade to "junk" status. Doing so would increase the cost of borrowing, worsening the deficit and making it even harder for taxpayers to dig out of the hole.
“We’re in a death spiral—Illinois has the worst pension crisis in the nation and needs the boldest reforms,” Ted Dabrowski, Illinois Policy Institute’s vice president of policy, told Fox News. “There is no doubt that junk bond rating is on its way.”
As we first reported a month ago, S&P first warned it would most likely lower Illinois' credit rating to below investment grade if the state fails to adopt a budget for a third straight year. Lawmakers are now in a special session in an effort to break the budget impasse, prodded by Republican Gov. Bruce Rauner... who has referred to his state as a “banana republic.”
There's ample reason for such a fruity comparison: the state faces over $250 billion in unfunded pension obligations, a $7 billion budget deficit, a backlog of over $15 billion in unpaid bills, and - drumroll - $800 million just in interest on unpaid bills.
A downgrade to “junk” status would immediately spike the cost of borrowing for all projects, including critical infrastructure, as well as refinancing existing debt. Which for a state in the "ponzi finance" stage of the Minsky curve, is critical.
Dabrowski said passing a budget would “stave off” the junk rating, but the pension crisis in the state could only be remedied by “bold reforms,” such as a transition from pensions to 401(k) plans. He said the state risks becoming the “financial deadbeat of the nation.”
With just over 72 hours remaining, some lawmakers still see hope for a deal.
Senate President John J. Cullerton, a Democrat, “remains optimistic” the legislature can reach a balanced budget, as there is a “shared sense of urgency” among the legislative leaders, according to his spokesman. “For a state with history of dreaming big and building big, a downgrade to junk status would be an embarrassing black mark on our standing and signal an unacceptable lack of confidence from the financial sector in our state,” Cullerton’s spokesman, John Patterson, told Fox News.
Rauner claims that the Republican plan for a budget could fix the state’s financial situation and called it a “true compromise.”
The plan incorporates reforms like property tax relief, term limits and spending caps, which have caused an “ongoing confrontation” between him and Illinois’ Democratic House Speaker Michael Madigan, one Republican leader told Fox News, adding that the two have been in a “stalemate” since Rauner took office two years ago.
“Gov. Rauner inherited this financial mess when he took office, and his proposals have been met by resentment from the speaker,” Deputy House Republican Leader Dan Brady said. Brady added, “we are asking that the speaker allow for a date and a vote before June 30.”
When asked whether the legislature would be able to pass a budget package by the June 30 deadline, and about the likelihood of the change in rating, Madigan’s spokesman Steve Brown did not speculate. “I don’t do predictions—there are numerous discussions around the State House on an effort to bring a balanced budget and see where there might be support for that,” Brown told Fox News. “I’m not in finance.”
And if the budget fails, Illinois will — as we reported before — lose the lottery. The state lotto requires a payment from the legislature each year. The current appropriation expires June 30, meaning no authority to pay prizes. In anticipation of the budget deadlock, the state already is planning to halt Powerball and Mega Millions sales.
“It is disappointing that the legislature’s inability to pass a budget has led to this development and will result in Illinois lottery players being denied the opportunity to play these popular games,” Illinois Lottery Acting Director Greg Smith told Fox News.
Of course, if Illinois becomes the first US state ever downgraded to junk, and the yields on its obligations explode forcing the 'deadbeat" state to collapse into a "death spiral",