As Orange County, CA was making its final bankruptcy bond payment to end its 23-year bankruptcy reorganization; Illinois, Connecticut, and Maine went into default shut-downs after failing to pass state budgets before the start of their July 1st fiscal years.
In a historic trifecta, the Legislatures of Illinois, Maine, and Connecticut gave up on passing a budget late on Friday, June 30. As a result, the governors of each state began rationing services and beginning furloughs to avoid payroll checks bouncing.
Illinois was already in the worst financial shape of the deadbeat states, with over 180,000 of unpaid bills amounting to over $15 billion sitting at their state controller’s office. Illinois is on track to become the first U.S. state to have its credit rating downgraded to “junk” status, causing the state to pay higher rates on its $200 billion in debt and liabilities.
When the Chicago Public Schools, with about 400,000 K-12 students, was downgraded to junk two years ago, the interest rates they were paying to borrow short-term cash went from 3 to 4.64 percent. But after the State of Illinois failed to pay a $215 million pension payment on March 1st, CPS has been forced to pay 9 percent interest on some bonds, according to Bloomberg.
Connecticut’s Democrat Gov. Dannel Malloy and Maine’s Republican Gov. Paul LePage are locked in political budget battles with their Legislatures. Illinois’ Republican Gov. Bruce Rauner is trying to pass a budget in special sessions this weekend. But if he fails, an Illinois downgraded to “Junk” on Monday could set off the type of spiking interest that bankrupted Orange County two decades ago.
Orange County was known in the 1980s and early 1990s as ‘America’s Most Republican County’. Despite a cyclical real estate decline, the “OC” had been making over $100 million a year by leveraging up its payroll account in a Wall Street investment scheme. Orange County was recognized in 1993 as the top short-term investor in America and was awarded the Moody’s Credit Service’s premier government credit rating of ‘MIG1.’
But on Monday, December 5, 1994, “The OC” shocked America by filing the largest Chapter 9 municipal bankruptcy in history, after announcing on the preceding Friday a $1.7 billion loss after its investment scheme imploded. The California Republican Party that held the governorship and had been in a strong statewide position, lost tremendous credibility and has been continuously sliding ever since.
Orange County agreed to issue long-term bonds to pay back the losses; then fired about 4,000 of its 17,000 union employees to fund bond payments over the next 23 years. Those employees lucky enough to keep their jobs were so thankful that they worked much harder so that the public would not be further angered by a deterioration in services.
Governors started service shut-downs for Illinois, Connecticut, and Maine at midnight of June 30. If states can not resolve their budget crises quickly, banks and municipal bond buyers will demand higher interest rates for all government borrowers on Monday.