People have asked me for years, exactly when will Illinois' horrible financial condition come to a head; and more recently people have been asking when the recent budget battles between Governor Bruce Rauner and State Majority Leader Michael Madigan will end. More importantly people have asked when the state elected officials will come to their senses and work to put the state's fiscal house in order.
In the past, it has been hard to determine when and how these situations will happen.
Obviously fiscal sanity did not exist as Illinois governors and legislators passed "balanced" budgets that were billions of dollars out of balance. Nobody seemed to care as my organization, Truth in Accounting, and other organizations highlighted the state's growing debt. As we pointed out that pension liabilities were going to explode, many legislators and the press just looked at us blankly and said they really didn't understand how pensions worked.
After years of trying to educate our elected officials and my fellow citizens about the state's true financial condition and getting the feeling that most people thought I was just a "Chicken Little" or "just tilting at windmills," I have decided that it will only happen when disaster strike.
But even as disaster has almost struck for colleges, is striking for many social service organizations who are not receiving their state funding, and will strike for public schools in the fall if nothing is done, the elected officials seem to not be willing to come up with a true financial solution for the Illinois.
When will the governor and legislators come to their senses?
When the state can't borrow any more money any more.
This may sound outlandish, but it remains possible. Back in early 2013, not that long ago, the state actually had to pull a bond offering. The state settled fraud charges with the SEC a couple months later. Capital market pressures did not abate, however. In late 2013, the state passed a pension reform law, leading to a different form of legal uncertainty. That uncertainty was resolved, after a fashion, in May 2015, when the state supreme court ruled that reform law unconstitutional – and the state, and its bondholders, were back behind a very large 8-ball.
Some state investors have tired of hiding behind the-8 ball. Earlier this week, BlackRock began calling for a “muni market strike” in Illinois. So far, this has been more rhetoric than reality, but it serves as a healthy reminder that the capital markets have limits. When the end there arrives, it can be really, really quick, and really, really, ugly.