The State Of Illinois Is "Past The Point Of No Return"

Tyler Durden's picture

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  • Unless used for capital improvements, any new Illinois State borrowing, regardless of security structure, will amount to nothing more than kicking the can further down the road.
  • Markets remain open to uncreditworthy government borrows longer than they should. In a low interest rate environment, investors will stretch credit standards.
  • Benchmark bond ratings are at variance with the rating agencies.

Everyone knows Illinois’ financial condition is poor. Conventional thinking seems to be that a bond default, should that happen, would be many years in the future. Pardon me, but wasn’t that the thinking right up to Puerto Rico’s, “We can’t pay” announcement?

To answer the question of just how badly off is Illinois, I assembled a list of key creditworthiness indicators and applied them to New York, a highly rated state, and Illinois.

Commentary and Benchmark Private Bond Ratings

The State of New York is managing its financial resources and obligations in a better-than-average manner. Particularly, the State’s employee pensions are reported to be 90% funded, but the general fund deficit must be contained and then eliminated. Unfunded OPEB costs are too high and can be renegotiated. Funded and pro forma unfunded long-term contractual obligations equaled 23% of general fund revenue in FY ended June 30, 2017, and exceeds the 15% threshold for a Benchmark AA or AA+ credit rating.

*Both NYS income tax and sales tax bonds are payable from annual general fund appropriation. For additional information, click here.

Commentary and Benchmark Private Bond Ratings

The State of Illinois, in my opinion, is past the point of no return. It does not have the ability to raise taxes or cut spending to the degree necessary to reduce the annual cost of bond and retiree benefits from 33% to a sustainable level. The amount of debt issued by Illinois requires a moderate 8% of general fund revenues to pay P&I.

The insolvency is not the result of too much bonded debt, but rather the government promising retirement and other post-employment benefits that aren’t affordable.

Bear in mind that direct debt of the State is exempt from any form of bankruptcy. Most believe that the State’s pension benefit obligations are on parity with states’ general obligation bonds and bankruptcy-exempt as well.

Let’s assume the State did find itself in a “no money to pay everyone” position and chose bond default as the relief value over failing to appropriate sufficient funds for pension funding and OEB costs.

Since neither GO bond holders nor pension fund creditors are subject to any bankruptcy court, who would win? Together they would be by far the State’s largest long-term contractual obligors. I think the State’s GOB investors would come out ahead because the State would not be able to borrow in its own name until it makes good on past due GO P&I.

Retired public employees might understand that it is better to negotiate a fair agreement than to demand one the employer can’t afford. This is the only scenario, however unlikely, where Illinois stands a change of pulling itself out of its deep financial hole.

Benchmark and rating agency ratings


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topspinslicer's picture

Started when they birthed the obammy water boy

J S Bach's picture

What?!  The government promising benefits that aren't affordable?!  Nah... couldn't be.

jcaz's picture

Sweet- sounds like they're talking about renegging on promises- only way to resolve it.

Can't wait for THIS chimp-out.....

NoDebt's picture

Crashing government pension funds.... it just never gets old.  Which is good because we've got TWENTY YEARS of this shit to look forward to.  Over and over, one after the other, like dominoes they're going to go down.


Philo Beddoe's picture

Late 40s here. Counting on zero government pension. If I do get something it will be wiped out by health care (insurance) I am sure. Or, massive tax increase as mentioned below. Or, both! 

YUNOSELL's picture

If Illinois does this, then everyone will do this -- It will be chaos!!!!

man from glad's picture

It’s called a bail-in. Will be mandatory. That and endless Fed cont+print. It’s a big shit sandwich and they will make everybody take a bite.

edotabin's picture

Everything is past the point of no return. Why would I care about Illinois?

MisterMousePotato's picture

Hey, Philo:

Why do you, and all others who seemingly think like you, believe that the only outcome to these problems is that NO ONE GETS ANYTHING?

For fucks sake, Man. All that is being discussed is some minor reduction in benefits. Look at Detroit. Oh, my God. Pensions were reduced from $10,000 per month to - what? - $9,200?

Oh, how the fuck is anyone supposed to live on that?!?

All this freaking hysteria over someone pointing out that the taxpayers really can't afford to pay every single fucking government employee a quarter of a million fucking dollars a year for 30, 40, or 50 fucking years after they retire decades before that becomes an option for the people who are supposed to pay for all this.

What is wrong with all you people? The way you talk, one would think that the solutions being discussed were about rendering you retirees into soap.

Stuck on Zero's picture

If bankruptcy works out well for Illinois politicians then a lot of states will follow suit.

Bigly's picture

Yes, like CT.

I believe CT resembles IL not NY as the retirement obligations are crushing.

Radioactive Ideas's picture

I certainly do not intend to speak for Mr. Bedoe, but the scenario you outlined is only the begining. Or "just the tip". As working populations dwindle (relative to retirees), the problem gets worse. As retirees live longer and draw these pensions yet longer it exacerbates the problem. Even the Detroit "solution" was nothing but a can-kick, ultimately. Also, you left out a few fucks and shits for the bond holders that only received $0.74 on the dollar.

MisterMousePotato's picture

" ... the scenario you outlined is only the begining."

You are probably correct. In ten or 20 years, they'll probably have to reduce pensions from $9,200 per month to $8,800.

This assumes, of course, that there are still any producers who haven't starved or died from exhaustion, or gone mad.

Tempted here to rectify my having left out some "fucks," to be honest, but I'm not sure if we're just talking at cross purposes.

So, have a nice day, Sir.

toady's picture

I don't know where you get your numbers... but I suspect it's like the old saying, "95% of statistics are made up on the spot"

I know a person in the Detroit pension system who's been cut from just over $3k a month ( maybe a little excessive, but who wants to retire into poverty?) to $200 a month. This isn't out of the ordinary, he has heard similar stories from other people that he used to work with...


MisterMousePotato's picture

I didn't get my numbers. I made them up. A slightly educated guess based on what I could recall from a couple/few years back.

As it transpires, my numbers were overly pessimistic. In reality, pension benefits were actually reduced a mere 4.5% (for some. Police and fire, of course, were untouched):

Quelle horreur!

Despite myself, I find myself wondering where YOU got your numbers.

shovelhead's picture

Bad investments have consequences.

Froman's picture

Making these City and State employees pay for their healthcare and put money into a matched 401(k) is long overdue.  30 years ago the U.S. Government realized that defined benefit pension plans under the old Civil Service Retirement System were not sustainable after they had people that worked as janitors for 40 years and never took a vacation in that time retire and they had to cut lump sum Appropritions checks for >$250k.  So they institued the Federal Employee Retirement System.  Anyone hired after 1987 no longer received a defined benefit pension.  They had 401(k)s where the Government matches 100% for the first 3% set aside by the employee and 50% on the next 2%.  They do not match over 5% and the money has to be put into a various fund (C fund - Stocks, G Fund - Government securities etc)  As for healthcare you select from a big book of health plans that shows the share the employees paid and the share the Government pays.  Additionally, employees can carry no more than 240 hours of vacation or they lose it.  So no huge lump sum pay outs or multiple year vacations while still on the government payrolll for those who did not take vacations every year.

GunnerySgtHartman's picture

Anyone hired after 1987 no longer received a defined benefit pension.

Actually, it's January 1, 1984, and FERS employees do receive a small defined benefit pension, certainly not enough to live on - hence the 401k plan.  FERS employees also pay Social Security taxes.  But your comment is very good!  +1

ClassicalLib17's picture

I'll bet Michigan doesn't have a clause in their state constitution that states: These pensions cannot be impaired or diminished in any way. Other than that what you described is the only way to solve the problem. They need to claw back a fair portion from the highest pensioners graduated down to the lower middle of the pack. And most impoertantly, eliminate the annual 3% compounding increases. A retired drivers training instructor in my town is currently receiving about $110,000 and growing 3% annually.

Give Me Some Truth's picture

Re: Pensions being wiped out

... Or it will be wiped out by inflation. This is really already happening.

Bastiat's picture

Bond holders, mostly institutional funds, have vast analytical resources and know exactly what they are getting into, chasing yield.  If the pensions take a haircut, the haircut for the bondholders should be equal, at the very least. 

Freddie's picture

Institutional funds and the big money management accounts do a lot of pay for play.  They will buy shit bonds to get bond offerings or money management business.  S&P and Moodys will look the other way or prop up shit bonds.,

hardmedicine's picture

is your avatar JROCK????



Five Star's picture

Every state's pension underfunding given realistic market values in terms of tax revenues:

Everyone is beyonf the point of no return

BarkingCat's picture

Anyone trusting the three rating agencies is either ignorant, insane or corrupt.

2007/2008 should have opened anyone's eyes to their deceit. 

jcaz's picture

Ya, late 50's here, I get the fear, but damn- can't squeeze blood from a turnip.  Pensioners in Chicago were promised a fantasy-  no one asked for proof of payment,  they gobbled it up without properly vetting it.   Let's stop blaming faceless entities for messes like this, and start making individuals personally responsible for gambling away the futures of people that they've been elected to protect.    Illinois is used to sending Governors to prison- just work down that line.....

Good for you for thinking rationally, tho-  you'll do well with your point of view.  The smart ones will get on with what needs to be done, the chimps will melt down.



JohnGaltUk's picture

Don't folks read history? Roman soldiers were promised a pension too and it turns out the promises were unfunded, so Roman politicians did what politicians have always done, turned on their own citizens with tyrannical levels of tax but it still was not enough and the citizens simply picked up their posessions and walked away from their homes.

This event took humanity into the fuedal system until the enlightenment which was about 1000 years. I would like to say that we can avoid this but with the type of crap that Uni's have been pumping out, I really am not so sure.

America was warned by Ayn Rand many times. Lucky the founding fathers gave all US citizens the right to own a firearm.

Hey Doc, what have we got a Monarchy or a Republic?

A Republic, if you can keep it!!

BarkingCat's picture

Frankly I would prefer an absolute monarchy. There is only one greedy bastard at the top and if he is smart he would not get those underneath him get too greedy and punishment for disobeying the ruler is very harsh. So is smart ruler will keep the sheeple happy and not shear them too much.

With career politicians you have thousands of greedy little pigs running around screwing everyone beyond reason

booboo's picture

If you are expecting a government pension you need to close your browser and get back to work unless you mean SS then carry on, its your nickel.

CoastalCowboy's picture

White lightning is my retirement plan.

Ikiru's picture

Early 40s here, so totally fucked. At least I'll probably live long enough to see Soros, the Clintons, McCain, and a lot of other evil fucks put in the ground. Of course, I'll also likely get to experience the glory of hyperinflation first hand. Seriously, how long can they keep putting off the impending collapse? I thought the ship was going down in 2008. Maybe anothe 10 years?

woody188's picture

You only have to be better than the rest. USA is still a pretty good value proposition versus the rest of the world.

Pausebreak's picture

I'm 65 and will probably outlive them.  If I do, I am going to piss on their tombstones.  At worst empty my decathereiter. 

what happened's picture


I understand, in my forties a trust in a non profit business was sold by the family and my pension was bought for pennies on the dollar.  Luckily I had other savings for retirement, but not everyone does.  We do have to honor the older folks retiring, but I think pensions need to have a limit like social security.  We cannot be paying people over 100000 per year.

Restless Boomers's picture

Don't worry, we'll have a new government and currency by then and everyone will have an 800 FICO score.

Anon2017's picture

My guess is that by the time you reach age 67, Social Security will be means tested and will amount to not much more than a welfare program. Seniors with Modified Adjusted Gross Income over $85,000 (single) are already subject to Medicare premium surcharges. This level has not been adjusted for inflation since the surcharges went into effect in 2007. In 2018, some higher income seniors will be subject to a 30% increase in Medicare premiums under a law that was passed in 2015.   

Sanity Bear's picture

These are people who made a career selling you out to get along with corrupt thieves.

May they all starve.

Kidbuck's picture

Finally some relatively good news.

"How is this Trump's fault?" - the words on every progressives' lIttle mind.

RedBaron616's picture

And then Social Security will do the same. Then we'll see who sits back and laughs at others calamity. The Socialist Ponzi scheme will collapse with much less money coming in and lots more going out and nothing there but government IOUs. Don't worry, they'll print more dollars but they won't be worth the dollars you put into the system. Prepare for your OWN haircut.

chubbar's picture

Yes, but that is the difference. SS money will be paid and in doing so, the gov't will kill the value of the dollar, what little is left. But the state pensions, unless bailed out by the US gov't, will not be paid OR be paid significantly less than what was promised. That means that not only do pensioners get fucked by getting less in pension benefits, but that the dollars that they do get will have less purchasing power, a double fuck you from the system.

RedBaron616's picture

They were affordable at the time if 1) Contributions required of employees as properly calculated 2) That money went into the fund to be properly invested and 3) Politicians didn't either raid the pension fund or ignore the reports stating for years it was underfunded.

Running a pension is not rocket science. Getting politicians to do the right thing is.

chubbar's picture

They weren't necessarily affordable at the time either. The tax dollars were never available at the amounts necessary for proper funding and the discount rates were always too high on purpose to hide the unaffordability of the program.

True Blue's picture

A minor correction or two, but it is at the heart of the matter.

"The government promising itself benefits that the people it is supposed to 'represent' had no say in that aren't affordable or physically possible and for which the average person with no such benefits is responsible to pay for."

Kprime's picture

you mean when they took a dump and laid that pile of shit that ended up all over the white house porch..  They still can't get rid of the smell.

RafterManFMJ's picture

Wait, is this article about Kenya?

hedgeless_horseman's picture


It does not have the ability to raise taxes...

Want to bet?

ghengis86's picture

lol!  That's what i thought.  What the fuck is stopping them?  They just raised income taxes...they will continue to fleece the people and businesses (that aren't moving out).  And as more move out, more increases.  same as it ever was.