* My Sun-Times column…
With all the hyperventilating news coverage of the state’s new 2 percentage point income tax increase, almost nobody has reported what Gov. Quinn actually said Wednesday when asked why he broke his campaign promise not to raise taxes by more than a single percentage point.
“As the last couple months have ensued, it was pretty clear from talking to major entities that lent money to the state of Illinois that the opportunity to borrow was fast eclipsing, and we had to do some very serious things on an emergency and temporary basis in order to get our fiscal house in order. You have to do what’s necessary at this moment, and that’s what I did.”
In other words, the big Wall Street bond houses laid down the law: Your problem is so horrible that you’d better fix your deficit now or forget about borrowing money at anything near a reasonable rate ever again.
When the bond guys say “Jump!” states usually ask “How high?”
Last spring, Illinois was threatened with a huge reduction in its credit rating if it didn’t immediately do something about its underfunded pension system. Within days, the General Assembly passed a sweeping pension reform bill.
But the bond houses never stopped making demands. They never do. “They always want you to raise more revenues,” said a onetime aide to former Gov. Jim Edgar, who said that Edgar always chafed at their insistent ways.
Illinois has built up so much debt, however, that we’re more vulnerable to the demands of Wall Street than most states. And so last summer, when the New York drumbeat increased in intensity, it seemed pretty obvious what was going to happen.
Back then, Quinn’s budget director, David Vaught, told Bloomberg News reporters that he expected the governor and the Legislature would pass a tax increase come January.
“We think it’s going to be substantial,” Vaught said. Asked to define “substantial,” Vaught pointed out that Quinn had testified to a House committee in favor of a 2 percentage point increase.
John Sinsheimer, Quinn’s director of capital markets, then piped up with a story about when he told overseas investors that Illinois could balance its budget with a 2 percentage point income tax increase.
“They looked at us and said, ‘Only a 2 percent increase?’ They were amazed by that.”
It doesn’t look so small now that the thing is the law of the land.
The truth is that this problem has been building for more than 30 years. Governors and legislatures have been skipping pension payments, pulling off one-time revenue gimmicks and increasing spending on things people demand, such as education and health care, without caring that Illinois didn’t have enough sustainable revenues to pay the piper.
Not enough was done when state revenues collapsed after the 9/11 attack, and nothing was done while the national economy collapsed in 2008.
The budget cuts made over the past couple of years haven’t stopped the flood of red ink because the problem was just too big.
Those of us who follow this stuff closely knew Quinn’s campaign promise last year to limit a tax increase to a single point was way too small to balance the budget. Not that his Republican opponent’s fish story was any better. Bill Brady promised to reduce corporate taxes and cut the budget by just 10 percent. One way or another, New York would’ve knocked all those ideas off the track because they wouldn’t have worked.
Were there alternatives to this tax increase? Yes. But Illinois didn’t elect an anti-government, slash-and-burn governor in November. We’re stuck with what we’ve got.
* Sinsheimer flew to New York yesterday…
With his coveted income tax hike in hand, Gov. Pat Quinn quickly deployed his financial troops to New York in hopes of convincing rating agencies that Illinois bonds are now a safer haven for investors.
John Sinsheimer, director of capital markets for Quinn’s budget office, was slated to spend Thursday meeting with the nation’s Big Three ratings agencies: Moody’s, Fitch and Standard & Poors.
The object: Convince analysts that the nearly $7 billion that will be raised through the higher taxes is a major step in the right direction when it comes to shoring up the state’s still-shaky finances.
If the agencies decide the tax hike has set Illinois on a better financial path, they could upgrade the state’s ratings, which could give the state better interest rates when it borrows money.
* And the market has reacted positively…
Municipal bond investors had been steadily losing confidence in Illinois bonds in recent weeks as Wednesday’s deadline for the General Assembly to approve a fiscal bill grew nearer and a plan to cover the state’s pension obligations remained undefined. But after Tuesday’s vote, the bond market reflected a change in sentiment.
For example, a 2003-issued Illinois municipal bond with a 30-year maturity and coupon of 5.1 percent rose 1.5 percent in price on the secondary market between Tuesday and Wednesday after the income tax was approved, according to a bond trader at a Chicago-based investment management firm. The yield on this bond decreased 17 basis points one day after the tax increase was passed. The bond price rose to 80.83 cents on the dollar Thursday from a meager 76 cents two days before.
The state’s credit risk factors into bond prices, bond traders say. When bond prices rise, it reflects that traders believe risk has decreased. Ultimately this is good news for the state’s finances, indicating Illinois can offer new bonds with lower interest rates to entice investors.
* Related…
* Quinn signs tax, Democrats point to spending caps
* Huntley: How tax increases will affect state
* It’s law — Quinn signs 67 percent tax hike
* You already owe thanks to new tax hike
- just sayin' - Friday, Jan 14, 11 @ 10:55 am:
Of course it is possible they heard “2% increase” and thought that meant 2% increase. It’s of course more like 60-some percent increase.
It’s 200 basis points up. Or I guess it’s also correct to say 2 percentage point increase.
- DavE - Friday, Jan 14, 11 @ 10:56 am:
The best we could hope for is to be taken off a negative outlook for now. We still have 8 billion in overdue bills, our pensions aren’t being contributed to while they are selling assets (a.k.a. In a death spiral) and the budget is out of balance around $2B. That is before considering Illinois won’t see these new revenues for a few months and it is already late into this fiscal year. The spending caps will also mean that spending will be done right up to that cap every year which is above any conceivable idea of what our revenues will be (i.e. more deficit spending). Then, you also hve the pension contribution which will eat up an ever larger chunk of spending which will either force the cut issue or force creative financing to pay for programs. Since the pending cap is implemented in chamber rules, which can be unilaterally changed by majority vote on a moments notice, I don’t expect much fidelity to those caps. We will be right back here in 3 years, tops.
If they wanted to end the deficit with tax hkes only, which is essentially what this plan is, they needed to hike takes to at least 7% on persinal income with a proportional increase on corporate taxes. Essentially exactly what the investors scoffed at when we told them 2% months sgo. They know the score here.
We kicked the can down the road, that’s all. Our social service providers may still go broke anyway because of the payment cycle.
- CircularFiringSquad - Friday, Jan 14, 11 @ 10:57 am:
Capt Fax:
The financial press is reporting this morning that the agents of the derivativrs traders have found something new to hype in the rush to start the muni bond meltdown and big wins on their short bets in the credit default markets.
They have seized on letters of credit issued by the big banks — surprised — that are now approaching renewal. Of course the big banks are demanding biggers fees — surprize #2 — and suggesting the letters might not be renewed.
Meltdowners are pushing this to spark more profits. Hundreds of issuers have no letters to renew. One story mentions the bonds on the Houston Football stadium and some demand the 30 year bonds get paid off in 3.5 years.
The muni bond issuers have been paying interest on time, not in default, etc. but the market can seize on these obscure points and drive highly leveraged trading
Similiar events happend before the scandal in the housing market which was also brought to you by the big banks and kicked off in ‘07 and ‘08.
Then the big banks had the predatory lenders, crooked mortgage brokers & appraisers, the so-called bond rating agency (who should be closed down already) helping in an effort that destroyed about 40% of the nation’s retirement savings.
The players here are less numerous, but are still trying to slime up the markets so they an profit.
- John Bambenek - Friday, Jan 14, 11 @ 10:58 am:
Just sayin-
I don’t think it likely that people who handle billions of dollars are the kind of people who would think a 2% increase means we would be changing our income tax to 3.06% instead of 5%. They may have no morals, but they aren’t stupid.
- Confused - Friday, Jan 14, 11 @ 11:01 am:
So basically Quinn raised taxes so that we can get a better Bond rating and lower interest rates on borrowing. Great - so now we can borrow more. Borrowing isn’t that what got us in this mess. Oh good my credit card company raised my limit and dropped the interest rate a little now I can charge more. Does anyone see the irony here.
- Rich Miller - Friday, Jan 14, 11 @ 11:08 am:
===Borrowing isn’t that what got us in this mess. ===
It surely helped.
- Yeah - Friday, Jan 14, 11 @ 11:09 am:
===So basically Quinn raised taxes so that we can get a better Bond rating and lower interest rates on borrowing.===Not completely but Its possible at this point borrowing to pay a mountain of Bills is only possible with a good Bond rating. Pushing 7 billion dollars into the state economy would be a shot in the arm. The problem will be the reflex action of the tax increase on business and costs jobs and the revenue that would come.
- cassandra - Friday, Jan 14, 11 @ 11:16 am:
From the general public’s perspective, I think the prospect of a big income tax hike in a very corrupt state was mitigated somewhat by the promise that this would significantly ease the burden on nonprofit social service agencies. After all, Quinn talked endlessly about not failing in our obligations to the less fortunate.
From comments here, and other comments in the press, it appears that this is not quite the case. There are winners here (let’s start with state employees including early retirees who continue to get free retiree health insurance until Medicare; also retirees in general who dodged the bullet on the taxing of retiree pension income). But non-profits seem not to be among them.
More fast talk from our Democratic leaders?
- wordslinger - Friday, Jan 14, 11 @ 11:22 am:
–“They always want you to raise more revenues,” said a onetime aide to former Gov. Jim Edgar, who said that Edgar always chafed at their insistent ways.–
Ain’t that the truth. And when you do raise revenues, their pals down the street at the WSJ kick you in the teeth for doing so.
Life is unfair, but the power of the very small investment banking community is particularly galling.
Having to listen to lectures on fiscal responsibility from rating agencies and underwriters — the folks who gave us the AAA-rated subprime mortgage “securities” that crashed the planet’s financial system — is beyond maddening.
As CFC noted in his excellent post, the SOI has never been late, much less defaulted, on a bond payment, since 1818. Seems like a pretty good credit history, doesn’t it?
Yet you have to go hat-in-hand to these reckless cowboys who aren’t really interested in underwriting (except for the juice they get for assuming about a half hour’s risk before issues sell out) but in creating products — and environments — that churn trades. Win or lose, they get a taste of every trade, just like bookies.
- Peter Snarker - Friday, Jan 14, 11 @ 11:24 am:
I guess if you want a pet bill in your industry passed you better donate within the limits and rules that exist, and that might buy some access for “little” bills and what-not.
But if you want to be able to force a hugely unpopular bill down the throats of a reluctant legislature, you better be bringing literally billions to the table.
Well, it’s good to know for future reference what it takes - essentially it takes the kind of $ that only the feds, the investment banks, or foreign governments can obtain… so those are basically the three types of entities that could get a tax increase passed to suit their needs.
Good to know.
- just sayin' - Friday, Jan 14, 11 @ 11:31 am:
Can’t believe no reporter has written yet on the big unreported story, i.e, the GOP deciding not to offer an alternative budget bill simply so they could get a campaign issue.
How can anyone praise the GOP for voting against, when we all know the GOP wanted it to pass more than anyone. Talking about GOP lawmakers, not GOP taxpayers.
- zatoichi - Friday, Jan 14, 11 @ 11:32 am:
The bond market is essentially like the title loan companies. You go to them if you have no where else to go. They got the bucks you need. They are there to make a profit, but they do not need you in particular. There are other places to go. So what are you going to do to make the investment in you attractive to these people? Without the tax increase there is no incentive to think you can pay off the bond/loan. Without the bonds, imagine the huge cuts Illinois would have to do? How many thousands of employees at state funded anything would loose jobs? Quinn had little choice based on the actual size of the problem.
- wordslinger - Friday, Jan 14, 11 @ 11:43 am:
–Without the tax increase there is no incentive to think you can pay off the bond/loan.–
Except for a 190-year on-time payment credit history for bonds.
– Without the bonds, imagine the huge cuts Illinois would have to do? How many thousands of employees at state funded anything would loose jobs?–
What bonds? Long-term state issues are for capital projects. There’s short-term borrowing for cash-flow, but no long bonds for operations.
- mokenavince - Friday, Jan 14, 11 @ 11:45 am:
I hope that the Gov. wakes up to the fact more work must be done to save business in Illonois.
Start with workers comp. insurnace . Every employer including the State, is getting hurt by MJM saying it will be done and never coming to pass.Gov. stand on your own to feet for once.It’s now or never.
- Honest Abe - Friday, Jan 14, 11 @ 11:54 am:
@Just sayin,
Seems like the do nothing and offer no alternative approach worked pretty well for the Republicans who unseated Pelosi.
When a majority dominates the process and shuts out the minority, they own the end product. It seems laughable for politicians who run their legislative bodies like dictatorships and constantly stifle dissent and alternative viewpoints to complain that members of the minority party have not offered any other options. It is always laughable to hear Mike Madigan trot out that old chestnut about Republicans sitting on the sidelines. He has never been an inclusive leader open to other person’s points of view.
- Small Town Liberal - Friday, Jan 14, 11 @ 11:59 am:
- He has never been an inclusive leader open to other person’s points of view. -
Well maybe the Illinois GOP should let the public actually see their point of view, then Madigan wouldn’t be able to get away with that. We’re still waiting on a plan that would actually fix the state’s finances without this tax increase.
- just sayin' - Friday, Jan 14, 11 @ 12:08 pm:
Honest Abe, that’s a cop out. There was nothing stopping the Republicans from putting out a better bill if they hated the one on the table so much. No one was “shutting them out” from that. It’s dishonest beyond belief for the Republicans to squawk now when everyone knows they were desperately hoping for the tax hike to pass. They want the money to spend too, just like the Democrats, but they also want to point fingers on the funding source side. Shameful. Just another example where the only thing we see from Republicans in Springfield are gimmicks.
Also, if Madigan is so bad, why did all of the House Republicans join in voting for him for Speaker on Wednesday. Cross gave all their votes to Madigan by unanimous consent and no Republican objected.
Yeah, I know it’s largely symbolism, but that cuts both ways.
- Statewide - Friday, Jan 14, 11 @ 12:08 pm:
To me, looking at the range of views on the state expenses and revenues, and that after the tax increase we are still in the ballpark with area and large state rates, what we got WAS the compromise position.
Between the cuts that Gov. Quinn has made, the income tax increase package that the legislature put on his desk, and borrowing to make a pension payment, the state avoids “slash-and-burn,” but yet still doesn’t solve the huge backlog of unpaid bills or solve things for the long-term.
Rich wrote “Were there alternatives to this tax increase? Yes. But Illinois didn’t elect an anti-government, slash-and-burn governor in November.” (While pointing out Brady’s plans were “a fish story.”)
What specific slash-and-burn budget cuts and smaller tax increases were/are actually possible this fiscal year and go further toward fixing a $15-17 Billion deficit than what is being done?
Conservatives said no new taxes and no new borrowing. Since we can’t shut down state government completely for a year, what would be left besides state bankruptcy? (i.e. balance the budget by not paying back debt, defaulting on pensions and benefits, then never borrow again and switch to 401k’s and no benefits.) Is that the GOP “plan”? What do GOP Reps and Senators really say to the unpaid organizations, institutions, and businesses in their home districts?
Specific alternative numbers please, totaling $15-17 Billion ASAP.
- CircularFiringSquad - Friday, Jan 14, 11 @ 12:12 pm:
Confused
understand if the credit rating was dropped
existing bonds would be declared and certain holders/investors would not be able to hold them in a portfolio
then all hell breaks loose
that was one the triggers that took down housing and erased our savings
- GoldCoastConservative - Friday, Jan 14, 11 @ 12:13 pm:
@Yeah Not sure if you are talking about revenues from the tax increase or from more borrowing to pay off bonds. If the former, I would argue that the Quinn/cullerton/Madigan plan will not “push $7B into the state economy.” It’s not new money coming into the state - its taking money from the pockets of individuals and businesses that are already here. It’s a zero sum game.
- One of the 35 - Friday, Jan 14, 11 @ 12:23 pm:
I realize this may be a minor issue but does anyone else have a problem with the fact that the state income tax increase is retroactively effective to January 1st? Are not ex post facto laws supposed to be unconstitutional?
- Rich Miller - Friday, Jan 14, 11 @ 12:25 pm:
===Are not ex post facto laws supposed to be unconstitutional? ===
I think you misunderstand that term.
The 1983 tax hike took effect in June or July (can’t remember now) and was retroactive all the way back to January of that year.
- Yellow Dog Democrat - Friday, Jan 14, 11 @ 12:26 pm:
I think this quote from FOX News sums it up:
Bill Strauss, senior economist at the Federal Reserve Bank of Chicago, told FBN the hikes were necessary and that residents shouldn’t be shocked in the least by the increase.
“We have a $12 billion shortfall in the state budget, and that is huge,” Strauss said. “I don’t think anyone in Illinois is surprised we are seeing these increases. But it will certainly impact growth and spending by consumers.”
The state’s low tax rates are what got it in this debt in the first place, Strauss argued, and the increases will bring Illinois up to speed with its neighbors in terms of taxes.
“We are basically bringing our tax rates, all in all, to something that is not significantly different from our neighboring states,” he said. “That is part of the problem, Illinois had such a relatively lower tax rate, and we were generating these huge deficits.”
- late to the party - Friday, Jan 14, 11 @ 12:26 pm:
GCC -
You could say that about any tax credit program. If you give Boeing a $1,000 tax credit, that’s taking $1,000 from the taxpayers’ pockets and giving it to Boeing, unless you make the corresponding cut to the budget. You could just give that money back to the public. But we know that pooling the money and giving it to a company as an incentive to do something creates a higher multiplier.
Same holds true for the unpaid bills. The $7B has not yet been spent in the state. The services have been rendered, but the payment never came. That $7B will be spent immediately on goods and perhaps even rehiring the nearly 50,000 jobs lost because those bills were never paid.
- Cook County Commoner - Friday, Jan 14, 11 @ 12:34 pm:
We all knew a state income tax hike was coming. Starry eyed optimists like me hoped it would have been accompanied by property tax/ school funding relief and other necessary changes. But the current legislative crew has other ideas, or lack thereof. So, its time to draw on the Queen of Mean, Leona Helmsley, who reminded us all years ago that “Only the little people pay taxes.” So, look at the Illinois’ and other states’ fiscal failures as an oppotunity. Some leveraged, closed end muni-bond funds are paying junk bond rates, and they are not subject to federal taxes. Buy in unless you believe there will be generalized state and local government defaults. I don’t, and I encourage Illinois and other state governments to further resist the structural changes needed in order to create more opportunities in the muni-bond markets. Also consider allocating some money to state tax exempt federal debt. There certainly are numerous other tactics. Remember: “Only the little people pay taxes.” Ask Madigan and Cullerton if their law practice clients have additional suggestions.
- Shemp - Friday, Jan 14, 11 @ 12:51 pm:
Frankly, if the Gov Quinn and his staff didn’t know what was needed in September/October to keep credit accessible, and only figured it out in November/December, then I’d say the Governor and his staff are in the wrong line of work. Why would anyone accept his explanation?
- jerry 101 - Friday, Jan 14, 11 @ 1:01 pm:
By calming the bond markets, and getting our Bond Ratings improved, the State not only can borrow new money at a lower rate, but it can also defease old, higher rate debt and issue new debt at lower rates. The state can benefit from improved borrowing rates without issuing a single penny of new debt.
Which will save the state money, and help get the fiscal house in order in the long run.
Its no different than when a regular person takes the steps necessary to improve their credit score, then refinances their home loan. You get a lower rate, and you save real money. So, if the state can refi $5, 10, 20 billion in existing debt from 5% to 4% now, that would save billions in the long run and improve the long-term budget health of the state.
- Small Town Liberal - Friday, Jan 14, 11 @ 1:45 pm:
- Frankly, if the Gov Quinn and his staff didn’t know what was needed in September/October to keep credit accessible, and only figured it out in November/December, then I’d say the Governor and his staff are in the wrong line of work. -
Well apparently his opponents and Gov. Christie still don’t know what it takes, so I’ll take Quinn any day.
- Fed up - Friday, Jan 14, 11 @ 2:29 pm:
Rich,
This still doesnt explain why Quinn cowardly went into hiding and never tried to explain why he was breaking his promise. Quinn hid away until the increase was passed showing a complete lack of leadership that continued with a tax bill signing behind closed doors, he knows he screwed the taxpayers and is trying to hide.
- Small Town Liberal - Friday, Jan 14, 11 @ 2:45 pm:
- lack of leadership that continued with a tax bill signing behind closed doors -
Yeah, I bet he thought that news was never going to get out.
- Secret Square - Friday, Jan 14, 11 @ 2:50 pm:
“Conservatives said no new taxes and no new borrowing. Since we can’t shut down state government completely for a year, what would be left besides state bankruptcy?”
We’ll never know for sure, but I suspect that had Brady won, his no tax pledge would NOT have held firm in the end. My guess is that drastic cuts would have been imposed or announced first, and then when those proved insufficient to save the state from total meltdown, a (smaller) tax hike would have been considered — the justification being “I guess things are worse than we realized.”
- Fed up - Friday, Jan 14, 11 @ 3:23 pm:
Secret Square,
I believe you are 100% correct,
- Grandson of Man - Friday, Jan 14, 11 @ 3:41 pm:
Cassandra,
You seem fixated with the benefits of state workers. Pension payments were guaranteed to state workers, and state workers by-and-large did their part by honoring their side of collective bargaining agreements. From some of the numbers I’ve seen, the majority of state workers will not have large pensions and are one paycheck away from financial catastrophe. Judges’ pensions, among the largest in the state, are a far cry away from retirement packages of top private-sector CEOs, who get hundreds of millions. The services judges provide are at least as vital as what top CEOs do.
When we state workers retire, after fulfilling our contractual obligations and before Medicare kicks in, and we get sick, what are we to do if we have no health insurance? If we get seriously ill and require expensive medical treatment, who will pay our bills?
- Just The Way It Is One - Friday, Jan 14, 11 @ 4:10 pm:
On the whole, well-done column, Rich, with many highly accurate and germane points, particularly the three paragraphs starting with “The truth is…,” “Not enough…,” and “Those of us…” And I understand it is your opinion, but a bit harsh, I felt, with the “we’re STUCK” Quinn slight at the end….IN the end, history will show the Governor and MANY of the policies he instituted while in Office during these horrendous times–and not just economic alone–will improve the lot of the majority of this and future generations of Illinoisans to come and make ours a far greater State than the, let us say, “challenged” one which he inherited….