Illinois credit ratings are the equal of corporate junk bonds, yet Illinois had to pay significantly higher interest rates to lure investors to buy the crap.
Illinois officials were forced to promise a yield that is about two percentage points higher than was paid by companies with similar credit ratings in recent bond offerings. The state's bond rating is one of the lowest among the 50 states.
What this means is that there are fools out there with cash who are willing to take a big risk for a higher return. When Illinois defaults on these bonds, let us not hear the administration of Gov. Pat Quinn or the bondholders beg the federal government for a bailout.
Even more troubling is where Illinois' bonds had to be sold.
Illinois tapped the taxable-debt market, where yields tend to be higher than in the tax-exempt municipal-bond market, because selling bonds to prop up sagging pensions typically doesn't qualify for tax-exempt status under the U.S. tax code, say bankers and state officials.
In other words, the bond houses that sold Illinois bonds, didn't even go to the traditional market of investors who like municipal and state bonds because they are not required to pay federal tax on their returns. Typically tax-free bonds are sold at a lower interest rate because they are tax-free, giving the investor a higher net return.
As for Illinois taxpayers, go screw yourself. Quinn is counting on the public not to understand how all this borrowing works. But state Sen. Chris Lauzen unveils the lies in this Tribune letter to the editor. Read it and get angry.
To be fair, here's a view from Capitol Fax that says all this concern over borrowing is hysteria. Rich Miller cites the Quinn administration as saying that the state received $6.1 billion in orders from a record 128 investors. Big deal. All it proves is that there are more fools out than we actually thought. Especially if they think that Quinn and Rahm Emanuel can convince their White House buddy, Barack Obama, to prop up the borrowing if the state runs into trouble.
Hey, Rich. Did you buy any of those bonds? As you said, "...smart investors know a good buy when they see one."