Illinois Still in the "Financial Condition Penalty" Box

January 16, 2016

Illinois Still in the "Financial Condition Penalty" Box

The $53M “Financial Condition Penalty” on Illinois’ January 2016 Bond Sale


Illinois’ Jan. 14 sale of $480 million in general obligation bonds brought the state nearly $53 million less than it could have received had it been in better fiscal shape.

The analysis also indicates that this “financial condition penalty” could more than double in future years if the crisis continues. And when future capital needs are included, the estimated penalty could grow to more than $400 million per year, according to the study.

“This analysis aims to quantify the costs of Illinois’ deteriorating fiscal health in the bond markets, what we are calling a ‘financial condition penalty,’” said Martin J. Luby, an IGPA visiting scholar who completed the analysis. “Analyzing the relative bond prices the state receives in the financial markets over time allows us to assess how investors perceive the state’s changing financial condition.”

Luby compared prices received from the state’s Jan. 14 bond sale with prices received for state bonds sold in 2006, when Illinois’ credit ratings were far better, controlling for other complicating factors. The January sale brought actual prices that ranged between 98 percent and 114 percent of par value. Using the counterfactual conditions from 2006, the prices would have ranged between 104 percent and 127 percent of the par amount. Based on these individual bond prices, the total dollars the state received for the 2016 bonds was just over $514.9 million, nearly $53 millionless than it would have received had the bonds carried the relative prices of 10 years ago, according to Luby’s analysis.

This analysis is part of IGPA’s continuing Fiscal Futures Project.

“Putting a dollar amount on the impact of the state’s financial condition hopefully helps policymakers and the public better understand the costs of the state’s lack of action in improving its fiscal health,” said Luby.

Recent analyses indicate that Illinois will need to issue much more annual debt than in the past to address its growing infrastructure needs — as much as $4 billion per year. If the state were to fund these infrastructure costs under current conditions, the financial condition penalty estimate climbs to $424 million, Luby said.

“This analysis adds to the mountain of evidence that Illinois is in very perilous financial straits,” said Christopher Z. Mooney, director of IGPA. “Never has it been more imperative that our state’s leaders work together to solve our fiscal woes — before they get even further out of hand.”


(.PDF 1.31 MB)

Research Area: Fiscal and Economic Policy

Policy Initiative: none