Smart borrowing?

Smart borrowing?

Hey buddy, can you spare $6 billion?

How smart is it to borrow from Peter to pay Paul?

Not smart at all, although those with vivid imaginations can conjure up a scenario where it might make sense.

Here's the key ingredient — the borrower has to be in terrible financial shape. Or, to put it another way — the borrower has to be the state of Illinois, which is in terrible financial shape.

The state, in fact, has a plan to borrow money to pay off a portion of its debts, and here's why.

Illinois has about $15 billion in unpaid bills. In fact, Illinois has been keeping its government running for years now by not paying its bills in a timely fashion, stiffing creditors on one side of the financial ledger while spending tax dollars on the other side.

Ordinary people can't get away with that kind of thing. But the state of Illinois does what it wants, but not without a significant cost.

Under current law, bills that are at least 60 days old generate a 12 percent annual interest charge.

So unpaid bills plus interest increase the size of the bill. That's why businesses that buy state debt from creditors eventually make good money on the deal.

In passing their recent budget and tax plan over Gov. Bruce Rauner's veto, Democrats authorized $6 billion in borrowing to make a sizable payment dent on the $15 billion backlog. Backers of the plan say the savings will come from borrowing at 6 percent a year to pay off bills growing at a rate of 12 percent a year.

Call it arbitrage, call it common sense, call it smoke and mirrors, there's no doubt that 6 percent is less than 12 percent. Hence, the savings is real if things work out as expected.

It's unclear what Gov. Rauner intends to do about the borrowing authorization. It makes sense on paper, but his office hasn't commented directly on the issue.

But there are some caveats here that ought to be taken into consideration.

Although the borrowing plan is billed as a money saver, it's still expensive. One analyst estimated a $6 billion loan will cost taxpayers $2.5 billion even if paid off quickly, and there's no reason to think the state is going to pay off this debt in an expeditious matter.

Even with the recent $5 billion tax increase, there is a real dispute about whether the 2017-18 state budget actually is balanced, as its backers claim, or $2 billion in the hole, as critics suggest. Different accountants can read the numbers in different ways.

Of even greater concern is the Legislature's propensity to continue to spend money that it does not have.

If Illinois is going to pull itself out of its really deep hole, legislators are going to have to embrace the kind of fiscal restraint they have flatly rejected in the past.

The state desperately needs more revenue and not just that generated by increases in the personal and corporate income tax. It needs the natural revenue that is generated by a growing economy that produces more good-paying jobs at higher incomes for people who then pay higher taxes to local and state government.

Instead, Illinois is enduring a slow-growth economy that is at risk of falling back into a recession. If that happens, experts say government revenues will fall significantly.

That's why the state is skating on thin fiscal ice. Sure, the borrowing ploy looks like a winner. But that's only because Illinois has been down so long that virtually anything looks like up to our legislators.

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