Here's your daily diet of BS about Illinois' budget

Not only is Illinois figuring to pile on more debt to pay its pension obligations this year, but the way it is borrowing the money is deceitful and even more expensive that it would first seem.

This requires you to pay attention, and Democrats and the public employee unions running this state are figuring that you won't. A detailed explanation is found here, in a report from the Institute for Illinois' Fiscal Responsibility at the Civic Federation. 
In a nutshell, this year's pension obligation, amounting to about $4 billion, is supposed to be paid from the state's general fund revenue. But because the state's budget is about $13 billion in the red, Democrats are looking elsewhere for the $4 billion. "Hey, let's borrow it," is the standard answer, just like last year when the state took out a $3.5 billion loan to pay for the obligation. It's as if Gov. Pat Quinn and Democrats figure that this can go on forever. 
The Civic Federation, noting the state's already low credit rating (which increases the amount of interest the state must pay on its borrowing), warns that the way the state is considering borrowing would "lead to dramatically higher debt service payments for almost a decade."
The problem is caused by a sneaky plan to "backload" the debt. The debt is structured, the report says, in a manner to make the new bonds more "affordable" by paying only interest on some bonds until fiscal year 2015. The chart below is somewhat technical, but it shows how the structuring increases the burden.


Explains the report:

The graph above illustrates the back-loaded nature of the POBs [pension obligation bonds] proposed for FY2011. The estimates included were provided by the Governor's Office of Budget and Management in May 2010 but the actual debt service would depend on the market conditions at the time issuance is sold. However, the structure shows how in order to make the annual debt service for the new bonds affordable, the State plans to pay only interest on the new POBs until FY2015. Then after the FY2010 POBs are fully repaid the State would begin to pay down the principal of the FY2011 bonds. By not paying principal in the early years of the FY2011 POBs, the interest cost charged for the new debt will be dramatically higher than the FY2010 bonds. The FY2010 POBs cost the State a total of $381.7 million in interest over five years, whereas the FY2011 bonds are projected to cost a total of $1.0 billion in interest for a similar amount of principal and only a slightly longer term.

Selling the POBs will lead to increased debt service that must be paid out of already insufficient General Funds revenues for many years to come. As previously discussed in this blog, although the State has reduced its appropriations over the past several year these cuts have not kept pace with the increases in required debt service for pension borrowing and the continuing increases in the State's annual pension payment. By continuing to borrow to make its pension payments, the State will exacerbate its financial problems and make it harder to balance future budgets. Borrowing for operational costs, such as the annual pension payment, is a one-time revenue source and not a sustainable solution for closing the State's operating shortfall. Selling POBs will also ensure that a similar imbalance between expenditures and revenues will exist in FY2012 when the borrowed funds are no longer available to make the annual pension payment.


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  • We just had an election for the top dog in the state and the people opted for a dead dog and his fleas.Most people won't look at any of this and they'll still complain about these bums.To bad they didn't make a better choice of representation.It sickens me to see these pirates in charge,I can't wait to leave.....

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