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Illinois is on the brink of becoming the first state to sink to junk bond status


Illinois is on the brink of becoming the first state to sink to junk bond status

WATCH  | Illinois could become the first state to get its credit rating slashed to junk bond status. Here's why that matters to businesses.

Illinois is on the verge of becoming the first state to get a junk-bond credit rating level and could go bankrupt. The rating is important because it tells how credit-worthy an entity is. Illinois is already the lowest-rated state.

The state's legislature has come to a deadlock and not been able to pass a budget for two years. It's now limping towards its third-straight fiscal year without a complete budget.

As a result, Illinois' unpaid bills have ballooned to $14 billion.

Those mounds of bills have led to a massive deficit and the threat of a junk bond rating for the nation's fifth-largest state.

"The state’s ragged financial picture has been steadily driving down its credit ratings with Moody’s and Standard & Poor’s while driving up its interest costs in borrowing to somehow prevent the state from going bankrupt," an article on Business Insider put it.

So where does the Land of Lincoln go from here?

"If you go down to junk bond status, the price of the debt service that you have in place goes up, and that’s just money going out the door that’s serving no positive purpose," Ralph Martire, executive director at the Center for Tax and Budget Accountability, told Circa.

And Illinois can't file for bankruptcy because it's not technically legal for states to do so. In fact, the last state to declare bankruptcy was Arkansas in 1933 after it defaulted on its debts during the Great Depression.

What's the alternative?

A federal or taxpayer bailout might be Illinois' only option. Though not all experts agree on this method, Martire says, in this case, tax policy should be a part of the equation.

"You have to have a rational tax increase tailored to raising adequate revenue that will generate sustainable funding over time for core services, period," he said. So that means Illinoisans' tax bills would have to increase to pay for things like education, health care, social services and public safety.

Since the 2008 Recession, Illinois has lagged behind other states in economic recovery. "We always are slower to recover from a general recession than other states," he said.

Beyond the economic weakness facing the state, he said the junk bond rating would also be simply bad for business.

"If you’re a high-end business, you care about infrastructure, you care about education systems," Martire said. "It tells businesses nationwide to be wary of coming to a state like Illinois."

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