The State of Illinois borrowed about $550 million last week to fund road construction in the state.
While market conditions gave the state one of the lowest interest rates ever, the lack of a financial plan still stung the state by an estimated $12 million. In addition, the state currently does not have spending authorization to spend the money it just borrowed.
Gov. Bruce Rauner’s office tried to put a happy face on the bond sale. "It's clear from today's bond sale that investors realize Illinois now has a governor that is trying to turn the state around and right its fiscal ship," Rauner spokeswoman Catherine Kelly said in a statement.
But the lower interest rate had more to do with investors looking for government backed investments than anything Illinois has done to right its budget.
In fact, the interest rate charged on the Illinois bonds is considerably higher than it would have been if the state was on more firm financial ground. Experts have said that taxpayers will pay an additional $12 million on the bond sale because of the state’s low bond rating.
Prior to the sale Moody’s Investor Service and Standard & Poor’s downgraded the state’s bond rating, already the lowest in the nation.
The state’s financial problems are evident and investors aren’t forgiving.
On Friday, Illinois will become the first state since the Depression era to end a fiscal year without a complete budget. On the same day, it’s possible Illinois will enter its second fiscal year without a budget.
The means the state hasn’t addressed its growing structural deficit and the $111 billion unfunded pension liability.
Investors don’t like that sort of uncertainty.
In fact, some analysts thought Illinois should have been punished more severely.
"It's odd to me," Nicholos Venditti, a portfolio manager at Thornburg Investment Management told Reuters News Service. "Illinois has proven time and time again they can't get anything done."
Even worse, the state can’t spend the money it just borrowed. The state lacks the appropriations necessary to actually write checks using the bond sale process, which were primarily for road construction and mass transit projects.
Rauner’s office has warned that unless a budget deal gets passed construction projects could get shut down, causing a loss of 25,000 jobs. The state could invest the borrowed money short term, but Treasurer Mike Freichs has warned the state will probably lose money if that happens.
Let’s summarize: The state has just borrowed money at a higher interest rate than necessary because of its budget impasse. That will cost taxpayers $12 million.
And, because of that same budget impasse, the borrowed money can’t be spent.
Sounds about right for Illinois.