Illinois’ bad credit costing taxpayers millions

CHICAGO (AP) — Like your cousin who doesn’t pay his bills on time and squanders money he doesn’t have, Illinois is paying the price — in both cash and reputation — for years of ignored warnings about its pension crisis, the worst in the nation.

Largely because of its unfunded retirement plans, Illinois has replaced longtime bottom-dweller California as having the lowest credit rating of any state. So when Illinois tries to borrow money, it faces the same problem as the spendthrift cousin: far higher interest rates.

The state’s financial failings are so well-known, they have inspired a name on Wall Street — the “Illinois effect,” a reference to the fact that cities, universities and other bond-issuing entities here must pay more in interest, even if they are responsible spenders.

“There are investors who won’t buy Illinois or bonds with Illinois labels at any price. They just see it as toxic,” said Brian Battle, director at Performance Trust Capital Partners, a Chicago-based investment firm. That means the state pays “the biggest penalty by a long, long shot.”

Battle compared the Illinois situation to someone who has a good job and plenty of revenue. But “we just spend like crazy, don’t pay our credit cards and haven’t saved for retirement,” he said.

Take the $1.3 billion in bonds Illinois is expected to sell this week to improve highways, rebuild a 40-year-old elevated train line in Chicago and buy land for an airport. Battle estimates the state will pay more than $18 million in extra interest each year than states such as Virginia or Maryland, which have high credit ratings.

That’s an additional $450 million over the 25-year life of a bond issue. In personal terms, it’s $36 taken directly from the pockets of each of Illinois’ nearly 13 million residents. And that’s for just one bond sale.

For decades, legislators skipped or shorted payments to state retirement funds, creating a $97 billion pension shortfall and making investors nervous year after year. Yet lawmakers in the Democrat-controlled General Assembly adjourned the spring legislative session last month without a deal. It was the fifth time in 12 months that they left town without solving the crisis.

Within days, two major credit-rating agencies downgraded the state to an all-time low for Illinois. Gov. Pat Quinn called lawmakers back for a special session last week, but they could agree only to form a bipartisan committee to keep working on the problem.

Contributing to the inaction are the state’s strong constitutional protections for pension benefits and a powerful union lobby that has opposed across-the-board cuts.

Still, the seeming lack of urgency dumbfounds some onlookers. Among them is Bill Daley, a former White House chief of staff and U.S. commerce secretary from the famous Chicago mayoral clan. He has focused on the pension debacle as he explores a challenge to Quinn in next year’s Democratic primary.

“You can’t have 13 downgrades in four years … and think people are going to come here and create jobs,” Daley said, questioning the need for repeated legislative sessions that yield no progress. “This is Groundhog Day.”

State leaders insist they are trying to deal with the crisis. But in a place known for backroom deals, compromise can be hard to find, even after years of trying.

House Speaker Michael Madigan, who has overseen a Democratic majority in the Illinois House for 28 of the last 30 years, acknowledges that fixing the pension mess is “extremely important for the future of the state.”