Illinois already has the worst credit rating among states. While that adds to the cost of borrowing money, Illinois winds up paying even more because investors view it as risky of default.
The Institute of Government and Public Affairs at the University of Illinois analyzed the numbers. Professor Martin Luby's study found the state paid about $80 million more over a five year period because of its reputation.
“Many investors just won't buy Illinois debt at any cost. 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,” said Luby.
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.
He says the state's recent action to overhaul public employee pensions will help the credit status and already resulted in lower borrowing costs in December.