This week Illinois borrowed $350 million to pay for projects including roads, bridges and schools. The state issued 25-year taxable general obligation bonds, the first borrowing by Illinois since the state passed its pension “fix” in early December.
But not unlike someone with a terrible credit score, Illinois must pay the highest penalty rate of the 50 states when borrowing money from the financial markets. Illinois’ inability to pay its bills, balance its budget or control its massive pension shortfall has earned the state the worst credit rating in the nation.
Illinois now pays a 1.58 percentage point penalty to borrow when compared to other fiscally disciplined states with AAA ratings such as Missouri and Georgia.
For example, if Missouri pays 4 percent to borrow money for 10 years, Illinois must pay 5.58 percent. That 1.58 percentage point difference translates into more than $75 million in extra interest payments — taxpayer money — for this $350 million, 25-year borrowing. Illinois has more than $30 billion in outstanding general obligation bonds.
And while the 1.58 percentage point penalty represents a drop from levels prior to the pension bill passage, it’s nothing to be excited about. It’s still the highest in the nation.
Illinois’ penalty rate has only fallen to the level it was at six months ago, when Moody’s Investors Service and Fitch Ratings downgraded the state’s credit rating to the lowest in the nation.
Pundits and many in the media are celebrating Illinois’ pension bill passage and a subsequent small drop in the state’s borrowing costs. But the fact is Illinois’ penalty rate for borrowing is still seven times higher than when Gov. Pat Quinn took office in early 2009.
That means legislators need to stop celebrating their “first step” on pensions — and get to work on the next one.