Illinois forced to delay bond sale, should have been cut to junk a long time ago

The State of Illinois is functionally insolvent. The state has $137 billion in unfunded pension liabilities ($241 billion if you actually use reasonable actuarial assumptions); $7 billion in unpaid bills and counting; virtually no rainy day fund; hasn’t had a balanced budget in 20 years; has already jacked up taxes so high that it has lost 170,000 residents in recent years, and that out-migration will likely accelerate if voters approve a progressive income tax structure that’s on the ballot in November. And on top of that, Illinois has a zillion independent taxing districts and the City of Chicago (which itself is run like a literal Ponzi scheme funded mostly by local institutional investors and is 100% dependent on state aid to cash flow) that pile overlapping debt, pension obligations, and tax demands on millions of residents. And Trump, McConnell, and some Federal Reserve personalities have bristled at the idea of bailing out floundering states like Illinois.

The state, however, is hardly alone in this spectacular level of dysfunction:

You can look at all the people moving away from poorly run states and see they are jumping from one side of that chart to the other.

But the state tried to hit up municipal market investors this week in the middle of all the chaos, and it did not go very well:

Illinois has postponed a planned $1.2 billion short-term bond issue for tomorrow and says the deal is now day-to-day. The state plans another $1 billion the following week. 

The state wants the $1.2 billion to ease cash flow issues stemming from the state’s delay of its income tax filing deadline to July 15 from April 15. The additional $1 billion is to fund summer construction projects and for the state’s pension buyout program.

The postponement of the deal is likely due to the slew of recent bad news coming out of the state. All three major ratings agencies now rate Illinois just one notch from junk and all have negative outlooks. The state’s recent revenues have been severely impacted by the economic shutdown, as April’s year-on-year tax revenues are down by $2.6 billion. And the Illinois Senate Democratic request for a bailout, followed by Sen. Mitch McConnell’s bankruptcy comments in response, for sure didn’t help market perception of Illinois.

All that pushed up the state’s borrowing penalty to nearly 400 basis points over AAA-rated credits, even before the state came to market. By comparison, Reuters reports that New York state bonds are just 13 basis points over.

Now, Illinois may have willing lenders in the market, but the spreads may be far beyond what Illinois is willing to pay.

In contrast, other borrowers including CaliforniaLouisiana and Maryland tapped the credit markets in March, while other municipal entities like New York City, New York State Power Authority, San Francisco, Missouri University, and San Diego’s Public Facilities accessed the market as recently as last week.

If Illinois can’t access the financial markets, it may eventually attempt to tap the new Federal Reserve “Municipal Liquidity Facility.” The program is not up and running yet, and accessing the money in the Fed program may not be easy…

 There are certain certifications Illinois must make to receive money from the Fed. First it must certify it could not successfully access the credit markets and second it must certify it is not insolvent.

It’s going to be very interesting to watch this unfold if Illinois hits up the Fed at some point. They are going to have to certify that they are solvent and the Fed is going to have to accept that certification to the laughter of the entire country.

Of course, it can’t be worse than the other garbage the Fed is picking up right now (like junk bonds in the corporate bond market) and pretty much anything they’ve ever told banks not to hold.

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