To say we saw it coming is an understatement.
On June 26th, two weeks after two credit-rating agencies (Moody’s and Fitch) downgraded Illinois’ credit rating, Gov. Pat Quinn led a sale of $1.3 billion in general obligation (municipal) bonds to fund much-needed transportation improvement projects statewide. This business journal was the recipient of a series of news releases announcing the projects, several of which are in Southwestern Illinois.
I’m not disputing the projects themselves. Certainly there is a plethora of deserving road, bridge and other infrastructure projects worthy of funding.
But because the Illinois General Assembly did not come to an agreement on how to solve the state’s pension mess, Quinn explained that Illinois taxpayers are going to have to pay an additional $130 million over the next 25 years (the life of these municipal bonds). That $130 million? It’s literally the difference between what Illinois paid for this June 2013 sale, says the governor, and what the state would have paid three years ago when its credit rating was better. Illinois now has the worst credit rating of all 50 states. Keep in mind that the $130 million in extra costs is specific to only a single bond issue.
Legislators’ pension reform impasse is also wreaking havoc on a local funding level, and will continue to do so. Local governments - including some in Southwestern Illinois - that were planning on issuing municipal bonds in the near future saw what occurred in Springfield in June and decided to hold off in case the bond market improved. Unfortunately, the state did not have the luxury of waiting; it had already been saving money by putting off much-needed road maintenance and was delaying the construction of new schools.
Looking at bond issues from a bigger-picture perspective, states and cities across the U.S. are discovering a similar truth: it’s just not as easy to find individual and institutional investors for public-sector projects as it once was. Interest rates are inching back upward, and it’s beginning to have a negative effect on the demand for municipal bonds - the very investment that funds our communities’ roads, bridges and schools.
The national decline in the demand for muni bonds - the steepest since the financial crisis of 2008, experts say - was fueled by Federal Reserve Chairman Ben Bernanke’s comments last month that the Fed is closer to slowing its government bond-buying program, which had been in place to keep long-term interest rates at record lows. Although these were only comments - not actions - and they were about government bonds (the Fed wasn’t buying any muni bonds), it was enough to cause investors to start selling off municipal bonds, too.
I mention this about the Fed because - as we all know - perception is often reality. In Illinois’ case, perception is definitely reality, and the reality is sobering. The perception and the reality is that we can’t come to the table and solve our fiscal problems, and it will continue to cost us more than we can afford.