The Illinois Comptroller’s April report is scary reading. The state is $4.5 billion in arrears on payments to vendors and others (like school districts and service providers) with no end in sight. The Comptroller expects 2011 to be worse. The following chart from the report looks to me like a deteriorating structural imbalance moving towards a delicate liquidity position.
As long as markets are willing to provide liquidity, the state will be able to continue on this trajectory. As we learned from the New York City fiscal crisis in the mid 1970’s, not to mention the banking liquidity issues beginning August 2007 and later, those institutions that depend on short term market access for viability will freeze up (seize up?) when the markets don’t cooperate.
The Civic Federation prepared a detailed analysis and critique of the proposed 2011 budget. In the report they graphically present the state’s roll-over of short term debt from 2009 to 2010. In 2011 the state expects to issue $4.7 billion notes for “voucher payments.” Where will the re-payments come from?
So here’s some simple math. The state’s debt service payments for 2011 jump from $1.6 billion to $2.8 billion. Short term debt will be $4.7 billion. The budget assumes $27.4 billion General Fund revenues in 2011, so it looks to me like debt service consumes a hefty 27.4% of that total. Red flag. Maybe there will be some roll-overs, some additional budget cuts, maybe some tax increases, maybe the economy will be good to the state and they will make it into 2012. But the long-term problem here is huge.
Bondholders are feeling sanguine since, like California, payments go to debt service before other services. As tax increases loom on the horizon, investors want that tax exempt paper. As the Civic Federation described:
As the State continues to issue more G.O. debt than it retires on an annual basis, the amount of General Funds committed to debt service payments will continue to rise. To make these payments the State pledges its full faith and credit to its bondholders and legally commits itself to transfer the debt service payment into the General Obligation Bond Retirement and Interest Fund (GOBRI) prior to paying any other bills or transferring funds for any other appropriations.
I’m putting on my public policy hat now (as opposed to financial analyst). There’s no mechanism for bankruptcy or receivership at the state level in the U.S. which may be comforting from an investor’s perspective, but lousy public policy. There’s no IMF and no process at the federal level to re-structure state finances other than handing out bailout grants or loans — which usually require increased borrowing or matching spending. There’s no Board of Directors as in the private sector whose charge is to protect shareholders (substitute “taxpayers” for shareholders) even when painful actions are necessary. So we are left with random taxpayer uprisings and the occasional vote for elected officials and the analysis of think tanks. Maybe there will be a lawsuit by vendors or school districts to get the state to meet its obligations. Maybe vendors and residents will vote with their feet. The preferred approach would be an objective mechanism with authority and mettle to resolve the fiscal mess. Someone please tell me that I am wrong …