From AP - News Local/State -

Illinois Fiscal Reputation Costs $80 Million More

A study contends that Illinois wears a "scarlet letter'' when it borrows money - which has cost at least $80 million over a five-year period.

The review by the University of Illinois Institute of Government and Public Affairs estimated the state's "risk premium'' in selling bonds to raise money.

This cost is on top of additional interest charges paid because of Illinois' worst-in-the-nation credit rating.

"Many investors just won't buy Illinois debt at any cost," said DePaul University Professor Martin Luby, co-author of the study, and visiting senior fellow at IGPA.  "And the ones who do buy Illinois debt are demanding really high risk premiums.  Probably higher than what the true risk of the security is."

The likelihood that Illinois would default on its debt is extremely low.  The last time it happened was in the 1840's. 

Still, Luby said investors who buy state bonds can be jittery.

The study found that on bonds sold from 2005 to 2010, bond-buyers demanded the remium based only on the state's fiscal reputation.   It notes the Prairie State's credit rating has fallen further since 2010.
 
Authors of the study collected data on all state general obligation bonds sold during the period and calculated interest charges above the extra paid based on credit rating.

Categories: Economics