Thursday, August 30, 2012

Illinois Debt Downgraded . . . Again

So, after another failure of Illinois politicians to address the ever-growing pension problem, Standard & Poor's (one of the largest credit rating agencies) has downgraded Illinois debt from "A+" to "A."  (see here)  Now an "A" might seem like a good grade, but when it comes to ratings of state debt, it is atrocious.  Only California has a lower debt rating than Illinois (these two states seem to be competing for last place).  Standard & Poor's has also attached a "negative outlook" to the rating, which means another downgrade may come soon.  What does this mean for Illinois?  It means that Illinois is going to have to pay more to borrow money.  For better or worse, bond investors pay a great deal of attention to debt ratings.  When ratings go down, they demand a higher interest rate on the debt of the rated entity.  Which in turn means that Illinois' fiscal problems will grow worse.  Since Illinois is living on borrowed money to fund its spending and pensions, the "hole" just got bigger.  This is a small glimpse of what a "debt-spiral" looks like.  If Illinois politicians continue to ignore the problem, the ratings will continue to drop, the cost of funding will continue to rise, the problem becomes bigger, rinse and repeat.  Once a "debt-spiral" gets started, delay only increases the difficulty and pain of pulling out of the "debt-spiral."  Time works against an easy solution.  As time goes on, the reforms to the pension system will have to be increasingly more drastic in order to fill the "hole."  If one wants an example of a more advanced stage of a "debt-spiral," one merely needs to look to Greece.

Update:  Since I mentioned California, here is the latest news on pension reform out of California.   

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