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The State Of Illinois Is “Past The Point Of No Return”

Courtesy of ZeroHedge. View original post here.

Authored by via StockBoardAsset.com,

Summary

  • Unless used for capital improvements, any new Illinois State borrowing, regardless of security structure, will amount to nothing more than kicking the can further down the road.
  • Markets remain open to uncreditworthy government borrows longer than they should. In a low interest rate environment, investors will stretch credit standards.
  • Benchmark bond ratings are at variance with the rating agencies.

Everyone knows Illinois’ financial condition is poor. Conventional thinking seems to be that a bond default, should that happen, would be many years in the future. Pardon me, but wasn’t that the thinking right up to Puerto Rico’s, “We can’t pay” announcement?

To answer the question of just how badly off is Illinois, I assembled a list of key creditworthiness indicators and applied them to New York, a highly rated state, and Illinois.

Commentary and Benchmark Private Bond Ratings

The State of New York is managing its financial resources and obligations in a better-than-average manner. Particularly, the State’s employee pensions are reported to be 90% funded, but the general fund deficit must be contained and then eliminated. Unfunded OPEB costs are too high and can be renegotiated. Funded and pro forma unfunded long-term contractual obligations equaled 23% of general fund revenue in FY ended June 30, 2017, and exceeds the 15% threshold for a Benchmark AA or AA+ credit rating.

*Both NYS income tax and sales tax bonds are payable from annual general fund appropriation. For additional information, click here.

Commentary and Benchmark Private Bond Ratings

The State of Illinois, in my opinion, is past the point of no return. It does not have the ability to raise taxes or cut spending to the degree necessary to reduce the annual cost of bond and retiree benefits from 33% to a sustainable level. The amount of debt issued by Illinois requires a moderate 8% of general fund revenues to pay P&I.

The insolvency is not the result of too much bonded debt, but rather the government promising retirement and other post-employment benefits that aren’t affordable.

Bear in mind that direct debt of the State is exempt from any form of bankruptcy. Most believe that the State’s pension benefit obligations are on parity with states’ general obligation bonds and bankruptcy-exempt as well.

Let’s assume the State did find itself in a “no money to pay everyone” position and chose bond default as the relief value over failing to appropriate sufficient funds for pension funding and OEB costs.

Since neither GO bond holders nor pension fund creditors are subject to any bankruptcy court, who would win? Together they would be by far the State’s largest long-term contractual obligors. I think the State’s GOB investors would come out ahead because the State would not be able to borrow in its own name until it makes good on past due GO P&I.

Retired public employees might understand that it is better to negotiate a fair agreement than to demand one the employer can’t afford. This is the only scenario, however unlikely, where Illinois stands a change of pulling itself out of its deep financial hole.

Benchmark and rating agency ratings


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