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Updated March 13, 2013 By: Mark Glennon

Illinois, we already knew, pays a penalty rate to borrow money because of its bad credit rating, which taxpayers ultimately bear. What we didn’t know is that, beyond that credit penalty, we pay a still higher rate because of our dirty reputation.

An analysis by the Fiscal Futures Project at the University of Illinois’ Institute of Government and Public Affairs found that even after controlling for different credit ratings and fiscal, economic and financial factors between Illinois and other states that sold  bonds between 2005 and 2010, the yields on Illinois bonds were still higher. They used a “scarlet letter’ metaphor to describe the special risk premium demanded by investors on bonds that carry the dirty name ‘Illinois.’

These findings suggest the presence of a reputational risk premium on Illinois debt that is in excess of the risk premium associated with the state’s actual default risk,” the analysis said. Articles on this today are linked here from Reuters and Associated Press.

How much does that cost us? As much as two-tenths of 1 percent, the study says, or about $80 million on general obligation bonds sold between 2005 and 2010. That’s not so much in a state with hundred billion dollar problems. However, that’s just for the state’s general obligation bonds. Other bonds and those issued by Chicago, Cook County and other local issuers probably have the same problem, thanks to the “Chicago way” and similar perceptions. The authors of the study also said ordinary creditors of the state — that backlog of unpaid bills — probably also charge a similar penalty. The state has to pay most of them 18% per year in interest. The authors also said the problem has probably gotten worse since 2010.

In other words, it’s not just the sharp-penciled credit analysis that dings Illinois in the financial markets. It’s the sense that we’re run by fools and crooks.

No wonder so many believe in the wisdom of free markets.

Illinois isn’t just financially bankrupt, it’s reputationally bankrupt, too.


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So is this a confession Mark? That because of the overblown hyping of IL real pension fund problem (It is not a crisis since IL can meet it’s pension fund liabilities for the next 18 years). You and your conservative buddies who are trying to prove that public pensions are not sustainable; will cost all of us increased taxes.

Why not talk about how all those tax incentives (bribes?) given to large corporations to relocate and/or stay in IL would more than pay the pension shortfall?

Why not be part of the solution instead of adding to our problems?

Jim Palermo
In my town, La Grange, we have police and fire pension funds that between them are about 50% funded. The liabilities have grown about 6% per year since 2000 and going forward our assets are expected to grow at 7%. Only in the last six months has La Grange adopted 21st Century actuarial assumptions on retiree longevity. The two plans have about 60 persons receiving benefits and 45 active employees. Due to these demographics, our plans have insufficient assets to fund the liabilities due those already retire. Active workers have no money in the plan. Since 2000 the pension benefits paid have the exceeded employer and employee… Read more »
Jim Palermo, I am sorry that La Grange is having problems with their pension obligations. The assumption of 21st century actuarial assumptions should actually help your situation (just a bit) as life expectancy in the United States is decreasing for most of us. In my home town of Des Plaines – many of our financial problems have been self inflicted from real estate speculation financed by TIF schemes the last of which (the 4th) the voters actually voted against. (in a non-binding vote) I know that many local communities lost a great deal deal of money in mortgage backed securities. We will probably have to pay decades… Read more »
Jim Palermo
Doug, I’d be interested in seeing your sources that say that life expectancy in the United States is declining. In the past few weeks the California Public Employees’ Pension System (CalPERS), the largest pension plan in the United States, began discussions on increasing fees to participant municipalities due to longer life expectancy. This actuarial adjustment will result in larger municipal contributions, yet are necessary to allow pension benefits can be paid years into the future. Last month the Society of Actuaries, the professional body responsible for gathering data and developing actuarial models, released for public comment the RP-2014 morality tables, which predict longer lives for Americans. When… Read more »
My sources were informal – there were several news stories about it a couple of years ago. There are certain populations in the US that are living significantly shorter lives. Much of it seems to be healthcare related – some of it seems to be stress related – perhaps staying employed in a moribund economy. It is interesting this is not showing up in actuarial data as of yet – I wonder how long it takes for a trend to establish itself before showing up in actuarial data? The risk for the actuary is such that it is better to ignore contrary trending for a while… Read more »
Mark Glennon
Doug, my article you cite is not hype. It’s about the comments of John Bury, an actuary in New Jersey, who has no skin in the game. My persistent claims that most pension underfunding is very roughly 2X worse than officially reported is now the norm, except in Illinois’ official numbers. The NYT, Moody’s and every (yes, every) independent expert says that. Some go much further, like last year’s Nobel Econ prize winner, who says IL pension problems are 3X bigger than reported. And, no, my article does not support your argument about incentives. The incentives we give for relocations are not in the billions in Illinois,… Read more »
I believe I’ve located your Nobel Prize winner’s statement. And his point is a good one. The rate of return that IL believes it will receive on its investments is rather high at 7.5%. Eugene Fama says they should use a historical rate of 2%. In this article: (Which had the link where I found the first article) It is opined that the rate should be 4-5 percent – but at those rates public pensions would cost too much in state contributions. (Even though those contributions are generally made to the pension fund in lieu of pay to the employees…) Just for a different perspective… Read more »
Mark Glennon
Mr. Mitchell- You lost me on the “confession” part. Most of these pensions don’t have a snowball’s chance of paying the obligations they’ve promised. The math doesn’t work. Most of them could not make 18 years’ of payments even if you bled them down to zero, which would then make them pay-as-you-go plans, which would be catastrophic. Honest assessment of pensions certainly does not imply support for tax increases. Denial of the problem is a fraud on pensioners, and they will go ballistic when they realize how badly they’ve been lied to. As for this being a “conservative” thing, please read what Warren Buffet has said, in… Read more »

Really interesting. No surprise, but really interesting. You can extend this concept to lots of other hidden taxes we pay because of the scoundrels, like depressed real estate prices.

Mark Glennon

Roger that, Rogerthat. In fact we’ve been working on just that point regarding total home values in IL. It’s clearly true, but a little tricky to get the right data to work off of.