When Illinois' government missed an important deadline on June 1, rating agencies downgraded Illinois bonds to one step above junk status, and warned that unless the political impasse is resolved by July 1, it's likely that they'll be downgraded again, to junk status. Illinois' debt has been exploding. In May 2016, the state had $5.03 billion in unpaid bills. That has almost tripled in one year with spending obligations exceeding receipts by about $600 million per month. As of June 1 of this year, it owes a record $14.5 billion in unpaid bills. On top of that, unfunded pension liability has been exploding as well. The state has more than 660 government pension funds. The unfunded pension liability for the state's five major plans is $251 billion, up 25% in the last year. Pundits are claiming that Illinois' situation isn't as bad as Puerto Rico's, because Illinois is a wealthier state and can impose higher taxes. In one sense, the two are the same: There is no hope of ever paying off these debts. Illinois hasn't passed a budget for the past two years. Investors.com and Bloomberg (1-June)
The Democrat-controlled legislature and Republican governor Bruce Rauner can't agree about anything. It's this political chaos that caused the June 1 deadline to be missed, and the same chaos makes it likely that a July 1 deadline will also be missed, which will trigger the bond downgrade to junk status.
The downgrade to junk status will not immediately force the state into default, but it will raise interest rates significantly, caused the debt death spiral (or, as S&P calls it, the "negative credit spiral") to accelerate. Anticipation of junk status is already affecting interest rates. Chicago public schools, which used to pay 4.64% interest on its bonds, are now paying an exorbitant 9%.
Other states are also facing serious debt spirals. According to a 2016 study by the Mercatus Center at George Mason University:
The best five states with regard to fiscal solvency are Alaska, Nebraska, Wyoming, North Dakota, and South Dakota.
The worst five states are: Kentucky, Illinois, New Jersey, Massachusetts, and Connecticut.
The rankings were based on cash solvency, budget solvency, long-run solvency, service-level solvency and trust fund solvency.... Barrons and Mercatus Center at George Mason University (2016)