Friday, February 1, 2013

In Illinois The "Chickens" Are Indeed Coming Home To Roost ... And Elsewhere Too

Reverend Jeremiah Wright of Chicago, among other things, liked to talk about the "chickens coming home to roost."

Could he have been forewarning Illinois citizens of the fact that its creditworthiness was rapidly becoming a thing of the past? Undoubtedly not but sombody should have been. An already seriously  bad situation is getting worse by the day.

And since the Democratically dominated state won't come to grips with its public sector pension problems and its other financial recklessness, relative to other states the interest rates on its borrowings will be going up considerably, putting even more pressure on its deficits each year. It's a vicious circle.

And what's going on in Illinois may be predictive of our nation's future creditworthiness as well, assuming we don't get our combined political and We the People act together and begin to make common sense decisions about spending, taxing, economic growth and the irresponsible behaviors of our big and ever growing government knows best gang of aristocrats.

Illinois Yanks Bond Amid Pension Woes reports the latest on the continuing political debacle in the "progressively" financed Land of Lincoln:

"Illinois took the rare step Wednesday of postponing a bond auction just hours before it was expected to launch, as concerns grew among investors over the state's deep pension hole.

While Illinois still has ready access to capital markets, state officials feared a jump in interest costs to attract buyers if they went forward with plans to sell $500 million in bonds for school and transportation projects. Bond investors have become increasingly leery of the state because of a deadlock in the Illinois Legislature over how to fill a $96.8 billion pension shortfall, considered by researchers as the worst among U.S. states.

"It's the first real market indication that, because of our fiscal condition, we couldn't sell bonds," said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago, referring to his home state. His firm had no role in the Illinois bond sale.

The potential jump in borrowing costs is the latest sign of growing fiscal challenges in Illinois. The state already is paying the highest interest rates—at about 3.2% on its 10-year bonds, according to Thomson Reuters Municipal Market Data—among U.S. states, and the Illinois government is behind on its bills to hospitals, doctors and pharmacies by an estimated $8.4 billion, according to the state comptroller's office.

Standard & Poor's Ratings Services on Friday downgraded the state's debt, aligning Illinois and California as the lowest-rated states. But while California's rate outlook is positive, the credit-rating firm warned of further downgrades of Illinois if the pension issue isn't addressed....

The decision by Gov. Pat Quinn, a Democrat, to delay Wednesday's bond sale sparked renewed calls for immediate action among lawmakers who have been debating potential fixes for more than two years. "The governor's delayed bond sale should direct our attention to the indisputable truth about pensions," said Illinois Senate President John Cullerton, a Democrat.

Still, no timeline exists for when pension legislation will be voted on, with the next likely deadline coming at the end of May when the legislature is scheduled to adjourn. Any plans to address the shortfall are expected to require cutting benefits for state workers and retirees, raising new revenue or a combination of the two. A plan that would have put on hold a cost-of-living increase for retirees and increase pension contributions by current employees didn't even get voted on earlier this month in the so-called lame-duck session, which took place before new legislators were sworn in.

The pension issue is further complicated by a state constitutional protection of promised pension benefits for current and former government workers, with labor unions planning a court challenge if lawmakers approve cuts. In its downgrade of Illinois, Standard & Poor's cited the likelihood of years of litigation and its potential drag on state finances.

State budget officials said they are still planning to go through with the bond sale, but haven't set a new date. States tend to postpone bond offerings only when circumstances change, roiling interest rates. For now, the projects the bonds were being sold to fund aren't expected to be delayed."

Summing Up

Ignoring problems won't make them go away.

And when unions insist on not finding solutions, the problems get worse.

And when the problems get worse, new loans are harder to get and the interest rates on those loans will be high.

And that will make the financial problems more acute.

The state constitutional protection, behind which the unions are trying to hide, won't provide money to pay the bills.

Only taxpayers can do that. Soon it will get down to tough decisions about how much of the limited taxpayers funds to spend on such things as public safety and security, infrastructure needs, and public services relative to the number of and salaries paid to current public sector employees compared to the cost of benefits for retired public sector employees who are no longer working.

The problem in Ilinois is analogous to trying to put ten pounds of s_ _t in a five pound bag. It can't be done.

In simple language, the same dollar can't be spent twice, and when borrowing those dollars becomes more expensive than it already is, the chickens will definitely be hurrying home to hear the fat lady sing.

That's my take.

Thanks. Bob.

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