The lay of the land
Monday, Jan 3, 2011 - Posted by Rich Miller
* The Chicago Tribune’s story last week about the upcoming budget debate was badly cribbed from my own piece several days earlier. Trouble is, the Trib story set off a lot of misleading reports, including this one…
Bill Gross, who invested $5.5 million of his own money in five municipal bond funds run by his Pacific Investment Management Co earlier this month, told CNBC on Tuesday he would avoid Illinois debt.
No, this is not just a one-year borrowing plan. The general idea being pushed by many Democrats is to get rid of the state’s structural deficit with a tax hike and then borrow to catch the state up on its overdue bills and extend the capital plan another year. The new debt would have a specific revenue source, and the bond houses would like that - snap analyses based on incomplete information notwithstanding.
* The state pays a point a month on its overdue debt. Bonding would be cheaper. Yes, the bonds won’t be paid off in a year, but nobody in their right mind could say that Illinois can solve this gigantic, horrific problem in a single year….
Governments take out loans routinely on one-time construction projects that have longevity, but borrowing to pay ongoing, operating expenses is typically ill-advised.
Rep. Frank Mautino, D-Spring Valley, said such a loan would have to have a much shorter term than a bond for a highway or bridge so that carrying costs are less.
Mautino said it would have to be accompanied by a dedicated pot of money to pay it back, such as an income tax increase. Quinn’s proposed 1 percent hike wouldn’t be enough, he said.
More…
The Marion Democrat and chair of the House Finance Committee knows the state cannot generate enough revenue in the short-term to keep state services the same. Quinn’s plan to borrow $15 billion would cover $8 billion of unpaid bills. Bradley says that money will keep the state’s existing debt from growing exponentially.
“A problem that may have been able to be solved four or five years ago for a billion or two billion dollars then becomes a $12- or $13-billion problem,” Bradley said. “If it’s not addressed in a couple years, it will be a $20 or $25 billion dollar issue.”
* It’s also very possible that we could see some significant spending reforms, and not just in Medicaid…
Republicans might get behind efforts in the Senate to reform the state’s budget-busting Medicaid program, which provides health care for the poor.
State Sen. Pam Althoff, a McHenry Republican who was on a Senate committee that has been trying to tackle the issue, said she expects to see legislation moving soon. Changes could include changing who’s eligible for the program and how doctors are paid.
Althoff said Republicans continue to want to see spending cuts from state government.
“Medicaid reform, obviously, is one of those initiatives,” she said.
That Taxpayer Bill of Rights I wrote about before the break is just one aspect of the budget reforms floating around. There are more.
* Now, it’s possible the whole thing could fall apart. It’s also possible that some stuff may be enacted and other stuff may not be. There’s a lot to do in just a few short days. Still, it’s crunch time…
This is the end of 26 year veteran Ron Wait’s career. And he says the Legislature will have to act.
“Usually when the Legislature gets in crisis crescendo, it will get things done and I think we’re at that point right now.”
And…
“Insiders” believe that there are at least eight incumbent House Republicans that are leaning towards voting in favor of tax increases during the lame duck.
* Related…
* Illinois Politicians Study Derivatives On State Debt: Illinois politicians are reviewing whether to follow in California’s footsteps by forcing the state’s bond underwriters to disclose what credit derivatives they have entered into on Illinois’s debt. Staff members working for Illinois House of Representatives Speaker Michael Madigan reached out to California officials on Wednesday for information about how the Golden State has gone about improving disclosures relating to credit default swaps on its own state debt.
* Legislature likely to take up tax hike
* In Politics, Live in the Present and Kick Problems to the Future
* Do Low Taxes = Low Unemployment?
* Brady’s political future in 2011 and beyond
* Follow the money as Springfield gets ready to reconvene
* New pension plan for firefighters, police not expected to deter applicants
- Laughing_all_the_way - Monday, Jan 3, 11 @ 5:53 am:
Bill Gross is right, and when he talks about bonds people listen. Illinois is beyond the point of borrowing its way out of its problems. Without another Federal stimulus package/bailout things are going to get pretty rough there very quickly. On the bright side, Quinns new 800,000 million new train to nowhere is spending money right on schedule.
Only in Illinois
- Quinn T. Sential - Monday, Jan 3, 11 @ 6:10 am:
Aside from an income tax increase; what are they suggesting as a “dedicated revenue source” to help manage the debt repayment?
- Sue - Monday, Jan 3, 11 @ 6:45 am:
Being a resident of illinois has gone from bad to worse- We are routinely featured on national news(CBS, NYT) as having the worst financial situation in the US- Yet we have a governor who proposes nothing but the same old nonsense- who in their right mind thinks the bond market would entertain 15 billion of new borrowing at reasonable rates- NY’s new governor has declared a state emergency and is proposing draconian cuts to deal with his state’s budget, Christie in NJ has in the past year imposed cuts and taken on his public unions- When will Quinn( and Madigan) wake up and recognize that accomodating the IEA, IFT, SEIU and ASCME is not what they need to be doing- Quinn should immediately impose substantial premium increasa for state retirees’ health insurance and otherwise begin to understand that Illinois has few options and little time to get its budget under control before everyone who can decides to move
- waitress practicing politics. . - Monday, Jan 3, 11 @ 7:18 am:
Thanks, Sue. How about an increase in health insurance premiums for currently employed workers, too? Or maybe you would like to live in New Jersey?
- wordslinger - Monday, Jan 3, 11 @ 7:22 am:
The Reuters story quoted is useless as well. How can anyone comment intelligently on a bond issue until they see how it’s structured — revenue source, payment cycle, amount, purpose? Talk about phoning it in — the reporter’s “expert” quote is a sound-bite she cribbed from TV!
- CircularFiringSquad - Monday, Jan 3, 11 @ 7:57 am:
Anyone asking Gross or the woman from 60 Minutes who was promoting defaults if they are shorting credit default swaps on IL munis?
No other reason to single out IL other than to make your bet pay off.
- Tom Joad - Monday, Jan 3, 11 @ 8:13 am:
Bonding out the payments owed to providers makes sense since the state has to pay 1% per month for their past due bills ( after 60 days). However, a revenue source has to be designated to pay off the bonds, like a cigarete tax increase, sales tax increases, dedicated internet sales taxes or a phone tax increase.
CNBC commentators have not pointed out that Illinois has to pay out the 12% annually to providers, which makes the commentators mislead the public on the problem.
- OneMan - Monday, Jan 3, 11 @ 8:17 am:
I would suggest that you not take Bill Gross’ comments lightly, PIMCO is a big player in the muni bond space so any decisions they are making are based on a lot more than a Trib article.
Then there was this as well…
Thoughts like that from Moody is not going to help the rates the state is going to be getting for it’s debt.
As for forcing the disclosure on credit derivatives is an interesting idea (not sure if we would ‘like’ the answer) but it begs a bigger question, would doing this chase off potential underwriters and force higher borrowing costs?
At this point one of the last things we need to do it anything that will increase borrowing costs and reduce players in the market.
- wordslinger - Monday, Jan 3, 11 @ 8:43 am:
The rating agencies, and the financial community, always want states to raise taxes and they always want them to issue debt. It’s incredibly lucrative for the underwriting industry.
Every bond issue that Illinois’ sells is oversubscribed and sells out in a New York minute.
As far as CDS, that’s just a casino game. Virtually no one who plays in that market is actually purchasing insurance against a state “default.” They’re just guessing which way the number will move from day to day.
- Excessively Rabid - Monday, Jan 3, 11 @ 9:00 am:
it begs a bigger question
1M, not to be pedantic, but please….
http://en.wikipedia.org/wiki/Begging_the_question
- OneMan - Monday, Jan 3, 11 @ 9:06 am:
== As far as CDS, that’s just a casino game. Virtually no one who plays in that market is actually purchasing insurance against a state “default.” They’re just guessing which way the number will move from day to day. ==
It tells you where the money is going.
- DuPage 14th - Monday, Jan 3, 11 @ 9:06 am:
Is the state *really* paying 1% beyond 60 days? Not to schools they aren’t. Even Lou Lang questioned whether the 1% was actually being paid to creditors on Chicago Tonight.
A 1% income tax increase doesn’t generate sufficient revenue to eliminate the structural deficit and pay the bonds. Not even close.
- Sue - Monday, Jan 3, 11 @ 9:13 am:
if anyone wants to get serious- in addition to charging market co-pays for health insurance for active and retired employees- Quinn should borrow some ideas from other states and modify the state pension COLA’s to “CPI not to exceed three percent”- we have been doling out three percent cola increases for the past 4 or 5 years when the CPI has barely budged- Even Social Security eliminated its COLA bump this year(and last but the idiots in Congress looking to buy off senior support for Obama Care paid out a one time bonus)
- piling on - Monday, Jan 3, 11 @ 9:14 am:
Sue, gov. christie’s idea of cutting the budget is skipping a $3 billion pension payment. The reforms to pension systems he trying to push are the kind of things Illinois has already done.
And then there’s the fact that while his state was being buried by a blizzard he jetted off to Disney World with his family leaving the President of the NJ senate in charge of the snow emergency.
Great leader that Gov. Christie, just ask him.
- cassandra - Monday, Jan 3, 11 @ 9:17 am:
Unfortunately, it is likely that if there is an income tax hike, the same old inequities will persist. Middle income and well-off retirees will still pay no state income tax on their pension income. Retiree couples, for example, who retire on combined pensions of $100k (certainly not unusual) would continue to pay nothing. The flat tax will mean the wealthy feel this tax increase far less than middle income families. There is no indication so far of property tax relief so middle class families struggling to stay in high-property-tax communities for the benefit of their kids will continue to carry a high property tax burden in addition to the income tax increase. In fact, their property taxes may rise as well. And middle class access to Medicaid could be restricted, it appears, despite the shaky economy.
President Obama took considerable political risks with his base to retain the Bush tax cuts in the middle class because he and his admin didn’t want to increase the fiscal burdens of the middle class right now.
Not so our local Democrats, for whom disregard of the economic plight of middle class citizens has become routine.
- wordslinger - Monday, Jan 3, 11 @ 9:29 am:
–It tells you where the money is going.–
What money? It’s had no effect on the demand for SOI debt, which is robust. Why? Bondholders always get paid first; the state’s never defaulted to them. It has ample authority to cover its nut. Same as it ever was.
However, the state is chronically in default to vendors, schools, and, of course, its annual pension contribution.
The CDS players are just gamblers, day traders. They’re playing the movement of the number, and there’s a winner and loser in every trade. They’d bet on the direction a frog will jump if it’s dropped on a hot skillet.
The CDS game is attractive because it’s unregulated and secret. The middleman (a very small club) gets juice (no one knows how much) in every trade. No one has a clue as to whether the protection “seller” could pay off a “buyer” in event of default, anyway.
The outlaw (as in not covered by law) CDS market is a lot scarier than any state default. Lot of banks and government and corporate pension funds have big money in them; more than stocks, more than mortgage-backed securities, more than T-Bonds.
- The Gimmees - Monday, Jan 3, 11 @ 9:31 am:
I don’t think you can so easily dismiss Gross’ comments. the returns on muni bonds have drastically fallen off and states like calif and NJ are more attractive right now than IL to muni investors. With the market beginning to rebound, I’m not sure munis are the most attractive option plus the bond issuance still does not address long-term structural problems.
- Rod - Monday, Jan 3, 11 @ 10:20 am:
The ability of Illinois to float $15 billion in bonds to pay off back debt would be only in part based on the revenue flow dedicated to those bonds. The bond statement will determine that flow. As others have stated a 1% increase in the income tax rate dedicated to the sinking fund for these bonds may not be enough.
According to the Civic Federationstate an income tax rate increase from 3% to 5 % for individuals and 4.8% to 6.4% for corporations would be expected to raise about $6.0 billion in new revenues. So if all of these funds were dedicated to the $15 billion bond float the borrowing plan could be paid for within 3 years.
But this does not solve the exisitng structural budget deficit and Illinois will continue to create new debt while the bonds pay off the old debt. Clearly Illinois is looking at numerous other budget reduction options, via the committees on reform.
K-12 education has up to now been spared direct cuts, even though General State Aid and Special Education payments were delayed for long periods of time and no interest was paid on these debts. The Illinois Constitution and its provisions relating to pensions for current employees are another very big issue.
I think when Bill Gross from Pacific Investment Management Co talks about the problem of investing in Illinois debt he is discussing the bigger picture including pensions and k-12 education costs.
- state mope - Monday, Jan 3, 11 @ 10:39 am:
DuPage 14th, I believe the state only has to pay 1% per month interest on so-called commercial payments (vendors, etc). The school payments and tax payments to locals are grant payments exempt from prompt pay interest.
- reformer - Monday, Jan 3, 11 @ 10:48 am:
There’s no way that 8 House Republicans would vote for an income tax hike without approval from Leader Cross. So Republicans who get upset about a tax hike, if it happens, should bestow blame on their own party leaders.
- DuPage 14th - Monday, Jan 3, 11 @ 11:09 am:
State mope, that was my point… they aren’t paying 1% on the total debt. You have to subtract out the money they aren’t paying interest on to get a true picture of what the actual penalty they are paying is. It’s considerably less than the 1%/mo number. The actual ’savings’ would be significantly lower than purported.
- Anonymous - Monday, Jan 3, 11 @ 11:28 am:
It’s possible that Republican House members are not supporting a tax increase because they are representing the desires of the people who elected them, which is what legislators are elected to do. I know it’s a Pollyanna statement, but why would they take a stand of approval on something that their constituents oppose?
- Bond_player - Monday, Jan 3, 11 @ 11:51 am:
Of course Illinois bonds sell; the last bunch came with the backing of part of the payment by the Federal Government. The question is with the newly elected house, will the Federal Government be as hospitable regarding situations like this.
Illinois needs to cut spending once and for all. A tax increase will just be diverted to some new programs.
- Anonymous - Monday, Jan 3, 11 @ 11:52 am:
So is the “education surcharge” now a “debt payment surcharge?” Or is the tax increase discussion now for a 66 percent increase instead of the 33 percent previously proposed. I am genuinely confused.
- Cook County Commoner - Monday, Jan 3, 11 @ 12:02 pm:
I’m just curious how local government will increase my property taxes. My new, significantly lower assessment takes effect on the second installment in 2011. The dance to be played with the tax rates and multiplier will be a marvel to behold. So I’ll have an increased income tax and property tax. And a couple of municipal bond funds I own are taking a licking. And this is how we craft a recovery?
- Rich Miller - Monday, Jan 3, 11 @ 12:15 pm:
Like Gross, many of you are missing the point. If the state raises taxes to get rid of its structural deficit and has a revenue stream for the bonds, there is no real argument against this.
It’s not like using one credit card to pay off another one. It’s like getting a decent job after being unemployed for years and then using some of that new income to pay off your past due debts.
- wordslinger - Monday, Jan 3, 11 @ 12:15 pm:
–Anyone asking Gross or the woman from 60 Minutes who was promoting defaults if they are shorting credit default swaps on IL munis?–
CFC your cynicism would be astounding, except for the fact that Goldman Sachs has been making a killing flogging their “analysis in the financial press and then shorting for years. They’ve done plenty of pump-and-dump, too
They make billions and pay fines in millions — pretty sweet deal.
People have to stop thinking of today’s financial community as good, grey, Main Street bankers, George Baileys. Their compensation comes from taking the short view — quick kills — and they always take their money off the table.
- OneMan - Monday, Jan 3, 11 @ 12:34 pm:
Rich, I guess I am missing where Gross talks about the nature of the debt being one year..
http://www.cnbc.com/id/40830394
or in the embedded video, he just says he will avoid Illinois and that revenues don’t cover expenses and that he thinks we are going to be dependent on the feds.
What am I missing.
- Rich Miller - Monday, Jan 3, 11 @ 12:47 pm:
===What am I missing. ===
That he has a clue.
- wishbone - Monday, Jan 3, 11 @ 12:57 pm:
One major problem is that our governor is not a serious man. He would rather travel around the state passing out government goodies and attending opening ceremonies than address the real fiscal problems of the state. A mix of tough budget reductions, pension reforms, and modest tax increases would do the job, but Governor “happy” just isn’t up to it.
- Small Town Liberal - Monday, Jan 3, 11 @ 1:07 pm:
- A mix of tough budget reductions, pension reforms, and modest tax increases would do the job, but Governor “happy” just isn’t up to it. -
You mean except for the budget cuts he’s made, the pension reform that he signed, and the modest tax increase that he’s been pushing for since becoming governor, right?
- Fed up - Monday, Jan 3, 11 @ 1:28 pm:
Maybe he ment the seetheart union deals Quinn cut to get elected, or the lies he tells about getting rid of Blago appointees. or it could be his flip flop on every issue imaginable
- Rod - Monday, Jan 3, 11 @ 1:39 pm:
Rich, I think Mr. Gross is looking at the bottom line on a bond statement. That bottom line is that regardless of the revenue stream the bonds have the backing of the full faith and credit of the State of Illinois no matter what. By the way even a 2% tax increase with a corporate tax increase will not solve the structural problem.
I thnk Gross is questioning that full faith and credit backup because of the State’s overall problems. This ofcourse does not mean $15 billion in bonds could not be floated, if you pay enough someone will loan the money and accept the risk.
There may be more than 8 Republicans in the General Assembly that would support a tax increase if the increase all goes to the fund to pay off these bonds. Very major political forces in the Republican camp do not want to see the State fiscally collapse and realize it can not be done by budget cutting alone.
This is why the special committees in the House and Senate with balanced Republican and Democratic members were called that are dealing with education, workman’s comp, etc, were called. It is part of a trade off for votes on a tax increase, I am not sure it will work because some of things being pushed hurt Democratic Party interests esp public sector workers and their unions. To pull this off will require a major break of many Democrats from their supporters on critical issues. Even the Speaker of the House has to look at his own base of support and think about what such trade offs could cost and how real a fiscal collapse in the near future really is.
- Rich Miller - Monday, Jan 3, 11 @ 1:49 pm:
===Rich, I think Mr. Gross is looking at the bottom line on a bond statement. ===
Yeah, but that bottom line would be a whole lot different with tax hikes and budget reforms. He jumped the gun here, plain and simple.
- OneMan - Monday, Jan 3, 11 @ 1:56 pm:
Why this is in one way a the ‘eliminate the backlog borrowing’ is a really good idea.
If you resolve the backlog to schools and the rest, you are going to greatly reduce the risk (real IMHO) that at some point some government entity down the food chain (like a city or a school district) in this state ends up defaulting because of reduced revenues and late state payments.
Once you have a single default in this state of any size of government debt it is going to impact the rates of all public debt issued in this state in the near term. So if you can mitigate this risk significantly by getting ‘caught up’ that is going to do everyone a favor.
The downside is this state has a significant debt load and adding 13 billion to it is not going to help.
So it is a good idea for Illinois…
But why you might avoid Illinois debt. If it is not paying a better rate than other state debt (or enough of one) due to Illinois lower tax rate the tax advantages are not as great than lets say California debt if you live in California.
So you have state debt that is issued by a state..
With significant debt and debt that is going to be around for a while.
That so far has shown a real reluctance to deal with the underlying revenue/expense problems that have led to the need to issue this debt.
Has been unable to implement in a timely way the mechanism for paying part of it’s debt issue for the capital program with video poker (still not a single machine in operation or a single license issued) 18 months after the plan was approved.
Failed to put money it needed to last year into it’s notoriously underfunded public employee pension system.
With all those conditions and more as well as other states issuing debt, you are going to look for a higher return or you might as well buy bonds from states with less risk.
- Anonymous - Monday, Jan 3, 11 @ 2:06 pm:
“You mean except for the budget cuts he’s made, the pension reform that he signed, and the modest tax increase that he’s been pushing for since becoming governor, right?”
What cuts?
Pension reform that won’t pay off until much later?
Tax increase supposedly for education that would barely patch that hole.
The election is over, stop the Quinn propaganda.
- wordslinger - Monday, Jan 3, 11 @ 2:32 pm:
I find all this credibility attached to “Mr. Gross” about Illinois’ creditworthiness hilarious. Are you all going with the “Money Honey” and Jim Cramer advice, too? They’re flacks for the insiders who sucker the day traders. No long view.
Since 1818, when was the last time the State of Illinois defaulted on a bond? As far as I can tell, never — not in the Crisis of the 1830s, the Civil War, the 1890s, the Depression, never.
We pay bonds, payroll, and current pension obligations on time, but stiff everyone and pay the juice for late payments. But everyone gets paid, eventually. We’re a going concern.
Does Gross have a position in the market? Does he use his “expertise” to advance his interest on the cable shows? Heaven forbid.
How in the world do you get stuck with the reputation as a bad credit risk in the bond market when you have a 100% on-time payment record for nearly 200 years plus the ways and means to raise cash in a heartbeat?
Conversely, how did the exalted rating agencies give AAA credit ratings to sub-prime mortgage- backed securities? Because real estate would never go down? Brilliant.
If you don’t know who the chump is the first time the deal goes around the table, you’re it.
- Small Town Liberal - Monday, Jan 3, 11 @ 2:33 pm:
- Pension reform that won’t pay off until much later? -
Well, since nothing can be changed about employees existing pensions, this is the only reform possible. And are you saying you’d support a higher tax increase? Call your legislators. The election is over, so stop recycling worn out talking points that don’t make sense.
- steve schnorf - Monday, Jan 3, 11 @ 2:33 pm:
Anon 2:06 If you have to ask “what cuts” you are on the wrong blog. People here take it a little more seriously than the msm blogs
- steve schnorf - Monday, Jan 3, 11 @ 2:44 pm:
And, I think the pension reform started paying off today (unless someone got hired over the weekend)
- wordslinger - Monday, Jan 3, 11 @ 3:04 pm:
There was pension reform for new hires. That was a big step.
Folks at the Trib editorial board and Civic Federation think every state employee who was a janitor, painter, landscaper or food service workers gets the same kind of pension as a GA member, school superintendent or clouted multiple-job hack who gamed the system.
The state employees who have paid their 8% every year aren’t the problem. It’s the bipartisan GA and governors who sing manana when it comes to making the pension contributions.
- Secret Square - Monday, Jan 3, 11 @ 3:11 pm:
“Since 1818, when was the last time the State of Illinois defaulted on a bond? As far as I can tell, never — not in the Crisis of the 1830s, the Civil War, the 1890s, the Depression, never.”
I appreciate your perspective, Word, but I can’t help but wonder if there isn’t a first time for everything. Just because something has never happened before, doesn’t mean it CAN’T happen, right?
- Shemp - Monday, Jan 3, 11 @ 3:18 pm:
Significant increases in the income tax and corporate income tax might eliminate what is seen as the structural deficit this year, but it will be back the following year because the State’s expenses will continue to rise faster than the revenue streams. Health care inflation (employees and pensioners coverage as well as Kidscare and Medicaid), general insurance, pension contributions, wage (union) contracts, construction inflation (like the cost of concrete and asphalt) etc will all rise at rates faster than revenues will grow. There’s only one way out of the hole and it’s restructuring the whole mess, not just tinkering with the tax rate.
I’m not so blind as to think we can do it all without a change to the taxes, but I don’t think it’s sensible to raise them to fund a government operation that will only find itself back in the hole in 1 or 2 years.
- steve schnorf - Monday, Jan 3, 11 @ 3:20 pm:
Square, it goes further than that. No state in the country has defaulted on GO debt in my lifetime, at the very least since the Great Depression. I understand that fact alone doesn’t mean it will never happen, but it is obviously a very rare occurrence, and the markets know that. Why? States have almost limitless abilities to raise revenues (taxes) and no right to escape their debts through bankruptcy.
- wordslinger - Monday, Jan 3, 11 @ 3:49 pm:
What Schnorf said.
There’s a lunacy in the land, filled with emotion and ignorance (thank you, Rupert). Reason and knowledge would be appreciated.
- OneMan - Monday, Jan 3, 11 @ 4:03 pm:
Ok, at some point unless something is done, something significant is not going to get paid.
So yes default may not be a real option, but the current situation is unsustainable can we agree on that?
Also there are lots of reasons not to buy a bond besides default risk.
- Quinn T. Sential - Monday, Jan 3, 11 @ 5:47 pm:
{Ok, at some point unless something is done, something significant is not going to get paid.}
Significance is in the eye of the beholder. Right now there are a lot of significant things that are not getting paid, and there are more to come. Things will start to come to a head when IDOT employees just abandon their vehicles wherever they are when they run out of gas, because the fuel supplier will no longer come and replenish the storage tanks at the facilities.
- soccermom - Monday, Jan 3, 11 @ 6:05 pm:
What Schnorf and Wordslinger said, with a few additions. The rating agencies are aware that, under state law, the bond payments get made first. So the likelihood of default is minimal. The state may grind to a halt, school doors may be closed, sick people may be thrown out of hospital wards, but the rich guys on Wall Street will still get paid. So when the rating agencies take action to reduce our bond rating, what they’re really doing is increasing the yield for bondholders who aren’t actually taking on any additional risk. Barney Franks has been thundering about this issue for years, and he’s absolutely right. There’s no reason for bondholders to siphon more cash away from vital state programs and projects because of these downgrades. It’s infuriating.
- wordslinger - Monday, Jan 3, 11 @ 7:03 pm:
– So when the rating agencies take action to reduce our bond rating, what they’re really doing is increasing the yield for bondholders who aren’t actually taking on any additional risk.–
Back in the day, when I was in the business, I was in the Downtown Athletic Club in New York (pre-9/11; it came down with the Towers) in a small room of Wall Street muni underwriters, bond counselors and advisors — in other words, overpaid hustlers — to yack about the flavor-of-the-month economic crisis.
The Crack Wars were going on, there was a half-assed recession (not as bad as now), and Wall Street was bad-mouthing muni debt beause America was supposedly in a downslide and ungovernable (meanwhile, they were making fortunes off of muni debt).
The subject was the risk of muni bonds. The NGA and the US Conference of Mayors brought in a heavy hitter to set the Masters of the Universe straight: Mario of New York.
Mario came into the room, looked the Brylcream hustlers up and down, and said, the French and Anglo-Saxon words removed:
“Who do you think you are? Have I paid you? Yes. Do I owe you money? No. Am I a deadbeat? No. Do you make money off of me? Yes. Do you live here? Yes? Do I live here? Yes? Do you think you can shake me down? (many Anglo-Saxon words to follow)”
The Masters of the Universe, titans of finance, the Upper East Side and Wall Street, loaded their pants.
Way cool.
Mayor Daley, on your way out the door, do you want to spend some of your street cred and set these guys straight? I imagine you would enjoy it immensely.
- steve schnorf - Monday, Jan 3, 11 @ 7:07 pm:
mom, I’ve been thundering about it, too. People just don’t pay as much attention to me as they do to Barney Frank. The worst rated state GO in the land is safer than commercial AAA. Witness just the past few years.
- state mope - Monday, Jan 3, 11 @ 9:15 pm:
wordslinger, schnorf and soccer mom: agreed the bonds would be ’safe’, but there is still some uncertainty and resulting higher interest rates because it’s long-term debt to pay for operational costs-normally that is only done with short-term borroming (1-yr)
- Shemp - Monday, Jan 3, 11 @ 10:18 pm:
Bond ratings aren’t strictly about Wall Street making money for someone else. Those ratings affect the ability of your local school district to issue bonds for school improvements or cities for water treatment improvements because the State’s fiscal condition affects local bond ratings too.
And fat cats aren’t the only ones benefiting. There are lots of retirement portfolios out here that have their share of muni bonds in them. If the rates go up, the little guy benefits too (except that their taxes are higher to pay off the higher borrowing costs).
Then there’s the myth of the security/guarantee of public debt. It’s one thing to have the legal ability to pass on enough in taxes to pay for coming bond payments, it’s another to have the political appetite and willingness.