From today's edition of The New York Times:
http://www.nytimes.com/2011/02/18/bu...8illinois.htmlThe first time Illinois tried to bail out its teetering pension fund by borrowing billions of dollars, it ended in disaster...
Illinois hopes to sell $3.7 billion of bonds to make this year’s contribution to its fund. It is essentially paying a single year’s bill by adding to its already heavy debt load. That short-term thinking is not unlike Americans taking out home equity loans to pay for cars and vacations before the housing bust.
IMO, investors would do well to reject this latest effort to evade addressing tough fiscal issues. Moreover, as I stated during last year's fiasco, I believe the debt ratings agencies should place Illinois on junk status (lack of fiscal reform + continuing structural imbalances in its pension program). It should be noted that the credit analysts cited in the article argue that default risk is negligible. In the short-term that's correct. Illinois is probably not very likely to default on its pension obligations over the next year. In the long-run, it is far from accurate barring fundamental pension reform. Indeed, the credit analysts' excessive optimism is little different from the widespread cheerleading that coincided with the run-up of the housing bubble that sparked the recent financial crisis and severe recession.
Finally, despite claims that Illinois' budget has been balanced, it has not. In fact, the state will need to borrow more than $8 billion to cover its overall expenditures. That the state is making excuses that the borrowing relates to last year's deficit rings hollow.
IMO, rather than continuing deceptions, the governor and legislature should offer a credible multi-year plan to eliminate the state's deficits (probably over a 2-3 year period) and restructure its pension program. Acknowledging that the state's deficit problem will take a few years to address would be more accurate and more credible than the latest round of budget sophistry that is exposed when the state seeks additional massive borrowing, including for its chronically underfunded pension fund. Absent such a multi-year plan, the state should be placed on junk status.