How not to run anyone's finances, the case of Illinois

The way governments are being run these days is that if they don't have the money, they borrow it. If an individual's income were to fall, you wouldn't borrow to make up the difference, you would cut your spending. The only reason that you would borrow is that if you thought that the drop in income would be more than made up next year to not only let you pay off the amount borrowed but also the interest on the loan. Yet, Illinois has for years been borrowing money to keep spending more than it has. I recently heard that Illinois has the eighth worst government credit rating in the world. There are a lot of third world countries that have a better credit rating. When your credit rating falls any problems that you previously had get a lot worse because your interest rate and your payments go up. From the NY Times:

The governor proposes to borrow $3.5 billion to cover a year’s worth of pension payments, a step that would cost about $1 billion in interest. And every major rating agency has downgraded the state; Illinois now pays millions of dollars more to insure its debt than any other state in the nation. . . .

Public colleges and universities occupy a fiscal sickbed all their own. This year they muddled through without $668 million expected from the state; the University of Illinois has yet to receive 45 percent of its state appropriation. Legislators made no pretense of promising to pay this bill soon. Instead they authorized colleges to borrow against the expected state payments.

“The big fear is that next year we’ll be down twice as much,” said Randy Kangas, an associate vice president of the university. “No one knows how to make the cash flow work.” . . .

The state’s last elected governor, Rod R. Blagojevich, is on trial for racketeering and extortion. But in 2003, he persuaded the legislature to let him float $10 billion in 30-year bonds and use the proceeds for two years of pension payments.

That gamble backfired and wound up costing the state many billions of dollars. Illinois reports that it has $62.4 billion in unfunded pension liabilities, although many experts place that liability tens of billions of dollars higher. . . .



Blogger Harry Schell said...

About a month ago CA was announced by an international rating agency as 9th in the world for risk of sovereign default. I forget where IL was, I think in the top 20.

Either way, it is the Greek myth all over again, that deficit spending, a way-too-costly state, lots of welfare and a lousy business climate will get you to prosperity.

The pols depend on special interests, very much the public employee unions, to keep their seat at the trough. Unfortunately, as with keeping most unions happy, it is a suicide pact for anyone not in union "management" and the upper caste of the political class.

7/05/2010 12:06 PM  

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