Bonds from Illinois, the second lowest-rated U.S. state, are yielding less than issues from comparably rated Portugal as the state prepares to market the largest taxable municipal debt sale on record.
Next week Illinois is selling $3.7 billion of taxable debt to investors around the world after the end of the Build America Bonds program left the municipal market with pent-up demand for such securities. The offering will likely see increased interest from international and crossover buyers, said Richard Ciccarone, managing director of McDonnell Investment Management LLC in Oak Brook, which holds more than $7 billion of muni debt. […]
Its four-year bonds traded yesterday at a 4.40 percent yield. Comparable bonds from Portugal were yielding 6.15 percent, Bloomberg data show. The country, which has the euro- region’s fourth-largest budget deficit, has raised more than 4 billion euros ($5.5 billion) this year selling securities through auctions and private placements as the nation seeks to avoid resorting to international aid. […]
Illinois last month boosted income taxes 67 percent to help close its budget deficit, an act that has “resonated” with international investors, said John Sinsheimer, the state’s director of capital markets. The state has marketed the bonds in eight cities across Europe and Asia in the last two weeks, he said. […]
“They’re going to pay a penalty for their slow movement in addressing some of their basic weaknesses,” Ciccarone said. Still, “a lot of investors will be attracted since yields on investment-grade corporates are relatively low compared to what they can get on Illinois.”
According to Bloomberg, this is the largest taxable muni bond sale since 1990.
…Adding… Our resident budget expert Steve Schnorf points out in comments that the $10 billion pension bond under Blagojevich would be far larger than this one. Bloomberg may have made a goof.
* Meanwhile, Gov. Pat Quinn talked to the media today about the budget. Here’s the raw audio file from IIS…
“It’s going to be a lean year, we have to be very, very frugal,” Quinn said. […]
The governor would not say what areas will face cuts this time around, but said they will be done “in a fair way, a balanced way.”
When asked if state workers would face layoffs, Quinn said it “depends on the agency,” but noted the state has about 1,000 fewer employees now than when he took over two years ago. […]
“They’re talking about a governor that’s cut more out of the budget than any other governor in Illinois history, that’s what I’ve done,” Quinn said. “There’s always folks in the peanut gallery there that have unspecified reductions that they’re talking about. If they have ideas we’re happy to hear them, but you can’t hide in the corner.”
He also said he considered law enforcement and public safety a “core priority.”
* This week’s Capitol View features talk about the governor’s budget address next Wednesday as well as other stuff. Watch…
Online retail giant Amazon.com is closing a suburban Dallas distribution center and scrapping plans to expand Texas operations after a dispute with the state over millions of dollars in sales taxes, an executive informed employees Thursday in an e-mail obtained by The Associated Press.
Dave Clark, Amazon’s vice president of operations, writes in the e-mail that the center will close April 12 due to Texas’ “unfavorable regulatory climate.” Amazon spokeswoman Mary Osako would not say Thursday how many employees work at the Irving distribution center.
Texas contends Amazon is responsible for sales taxes not collected on online sales in the state. The comptroller’s office last year demanded $269 million in uncollected sales taxes from the company. The case is currently pending before the State Office of Administrative Hearings.
“We regret losing any business in Texas, but our position hasn’t changed: If you have a presence in the state of Texas you are required to pay sales tax, just like any other business that has a presence in Texas,” said Allen Spelce, a spokesman for Texas Comptroller Susan Combs.
A similar tax bill is sitting on Gov. Quinn’s desk.
I read a recent column in the Economist that basically urged debt “restructuring” in Ireland, Greece and Portugal. In effect, that would mean a controlled default, and the writer acknowledged that the Economist calling for sovereign nations to default on thier debts was more than a little odd and unexpected.
When the Economist believes the debt problems in Europe are bad enough to warrant “restructuring,” then you can bet Portugal and others are going to have a tough time borrowing money.
Illinois isn’t there yet gang, and the projected yields reflect that. As long as Senator Kirk and the pro state bankruptcy crowd stay out of the debate, I think you’ll continue to see relatively favorable interest on Illinois bonds.
Largest taxable muni deal on record? I seem to remember a certain state issuing $10 billion of taxable pension bonds some years back … where was that again?
Meh. Portugal is Germany and France’s problem. Any restructuring will be dictated and bankrolled by them to prop up the Euro. I don’t see much relationship to Illinois debt.
There are great opportunities in U.S. muni debt out there right now for investors who see through the lunacy of the broadcast financial media, aided and abetted by political screwballs like Newt and Cornyn. The former have a need to fill airtime, and the latter have a desperate need for attention.
Rich - lol, those bloomberg terminals are expensive, maybe the reporters don’t get an employee discount. Should be able to afford google though. Then they might’ve found some of the articles on bloomberg.com about the 2003 POB or california’s $5+ billion taxable BAB deal from 2009. But why do that when they have an opportunity to bash Illinois again?
I was under the impression that most “munis” are tax exempt, meaning the holder doesn’t pay tax on the interest earned, which increases the demand for the bonds and lowers the amount of interest the issuer pays.
I hate to sound like a rube, but does taxable simply mean the opposite of tax exempt, and if so, what percentage of state-issued debt is taxable? Also, what are the reasons Illinois would issue taxable debt (and thus pay more interest to sell them) rather than tax exempt debt?
47, as a quick and easy general rule, longer term capital projects can be done tax-free, and shorter or longer term operating expenses can’t. There’s a lot more to it than that, but it covers most eventualities.
47, before the Rosty-Reagan Tax Reform of 1986, virtually all state and local government debt was tax-exempt, meaning all earnings for investors were shielded from the tax man.
It led to an awful lot of abuse, with a lot of revenue bonds for private activity — sports stadiums, private urban renewal, etc. — being run through government entities to be more attractive to investors, while depriving the Treasury of a lot of money.
In the early 80s, the spread between tax-exempt government borrowing and earnings that could be me made in relatively secure private markets was so large, governments were borrowing money for no real purpose and investing it just for the arbitrage.
It was a sweet deal while it lasted.
- CircularFiringSquad - Friday, Feb 11, 11 @ 3:25 pm:
BTW those cheering for Chubs Christie to lure IL biz to NJ should be happy to know he just gave a $261 million tax give away to a nearly bankrupt casino in Atlantic City
The situation with Amazon and Texas is different than the Amazon tax passed in Illinois. They had a brick and mortar and employee presence in Texas, so sufficient Nexus to require them to collect sales tax on sales to Texas residents. The pending Illinois bill, based on a New York statute relies on click through referrals by Illinois residents to create sufficient Nexus to require Amazon and other Internet sellers with no physical presence in the state to collect sales tax on sales. Shipped into Illinois.
Thanks Word. I understand the potential problems with arbitrage, but the rest of your post sounds like what the IFA does now on behalf of nonprofit 3rd parties. Although I understand there is renewed federal interest in ending that too, it still helps attract cheap capital for needed projects that provide some benefit to the state.
In the real world, if you have enough pull in Congress, you can get exceptions for tax-exempt financing for virtually anything. In 1986, the “transition rules” of exceptions were as long as your arm.
There’s a reason that Tax Code is so long and garners so much attention from those in the game.
I think it was FY 12 that the no-layoff agreement with AFSCME lasted through (until June 30, 2012). I wonder if because of this agreement if it will be the budgets of the constitutional officers (e.g. SOS, AG, Treasurer, Comptroller) whose union workers are NOT covered under AFSCME (and instead the likes of SEIU, IFT, Teamsters, etc.) that could bear the brunt of the cuts this year.
Pat Quinn talks about a thousand less jobs on his watch but what he fails to mention is the thousands of temp. employees that the state has hired under his and Rod’s watch. I know one state highway team section that have almost as many temps. as they have full time help. They play the political game with these jobs and have allowed the temps. to join the union. This allows the same folks to be hired each year and they keep telling them that they will be hired next. When it came time to hire full time help in the district none of the hires were from the temp. group.
If you enjoy Tootsie Rolls, it is worth acknowledging that the Chicago based candy company is still here because Rostenkowski provided the business with tax breaks.
==Insuring $10 million of Illinois debt against default cost $260,000 a year yesterday, down from $357,910 a year on Jan. 6. The cost of insuring corporate debt from BellSouth Corp., rated two levels below Illinois, was just $31,060 yesterday.==
So much for the rationality of unfettered free markets.
In unregulated CDS, the cost of insuring a higher rated sovereign government that’s never missed a payment in nearly 200 years is higher than lower rated corporate debt.
Not that anyone is actually selling or taking out insurance on Illinois debt. The vast majority are naked swaps and everyone is betting the movement of the number — which has as much economic signifigance as betting on whether the Smails kid picks and eats it in “Caddyshack.”
But the spread does affect the market for selling the debt. Which makes the muni hysteria whippped up by elements of the financial press so crucial and so curious.
–The governor also said the National Guard is at the ready to take control of state prisons if correctional officers strike or take job actions. No union official has endorsed such a job action, but Walker said he was prepared for any contingency.
The Capitol news conference where Walker announced his plan had unusually high security, with four Capitol police offers stationed outside of it and checking on who was attending the event.
- cassandra - Friday, Feb 11, 11 @ 1:52 pm:
Who would he be laying off, since that no layoff agreement goes through fy 11, right.
This sounds to me like politician peak for no cuts.
How soon will we move to spend!! I wonder.
- 47th Ward - Friday, Feb 11, 11 @ 1:55 pm:
I read a recent column in the Economist that basically urged debt “restructuring” in Ireland, Greece and Portugal. In effect, that would mean a controlled default, and the writer acknowledged that the Economist calling for sovereign nations to default on thier debts was more than a little odd and unexpected.
When the Economist believes the debt problems in Europe are bad enough to warrant “restructuring,” then you can bet Portugal and others are going to have a tough time borrowing money.
Illinois isn’t there yet gang, and the projected yields reflect that. As long as Senator Kirk and the pro state bankruptcy crowd stay out of the debate, I think you’ll continue to see relatively favorable interest on Illinois bonds.
- Middle - Friday, Feb 11, 11 @ 2:09 pm:
–47th –
On this we are in complete agreement.
- steve schnorf - Friday, Feb 11, 11 @ 2:16 pm:
I would have thought our earlier $10B POB issue was taxable; in fact, I’m sure it was. So, to the market those weren’t “munis”?
- Rich Miller - Friday, Feb 11, 11 @ 2:20 pm:
Good point, Schnorf. Not sure why that wasn’t mentioned.
- TX - Friday, Feb 11, 11 @ 2:27 pm:
Largest taxable muni deal on record? I seem to remember a certain state issuing $10 billion of taxable pension bonds some years back … where was that again?
- TX - Friday, Feb 11, 11 @ 2:29 pm:
Schnorf is right, taxable is taxable. Same GO credit. Someone just doesn’t know how to use Bloomberg.
- steve schnorf - Friday, Feb 11, 11 @ 2:32 pm:
Just FYI, the tax increase isn’t going to be repealed, and IPI and IR are getting some more names for their fundraising list.
- wordslinger - Friday, Feb 11, 11 @ 2:33 pm:
Meh. Portugal is Germany and France’s problem. Any restructuring will be dictated and bankrolled by them to prop up the Euro. I don’t see much relationship to Illinois debt.
There are great opportunities in U.S. muni debt out there right now for investors who see through the lunacy of the broadcast financial media, aided and abetted by political screwballs like Newt and Cornyn. The former have a need to fill airtime, and the latter have a desperate need for attention.
- Rich Miller - Friday, Feb 11, 11 @ 2:33 pm:
===Someone just doesn’t know how to use Bloomberg. ===
That would be Bloomberg’s own reporters.
- 42nd Ward - Friday, Feb 11, 11 @ 2:41 pm:
There will be few, if any budget cuts that some group does not call “devastating.”
- steve schnorf - Friday, Feb 11, 11 @ 2:44 pm:
42, unless you assume we are just p_____g away most of our state money, most of the cuts will be pretty devastating to someone.
- TX - Friday, Feb 11, 11 @ 2:54 pm:
Rich - lol, those bloomberg terminals are expensive, maybe the reporters don’t get an employee discount. Should be able to afford google though. Then they might’ve found some of the articles on bloomberg.com about the 2003 POB or california’s $5+ billion taxable BAB deal from 2009. But why do that when they have an opportunity to bash Illinois again?
- 47th Ward - Friday, Feb 11, 11 @ 3:08 pm:
I was under the impression that most “munis” are tax exempt, meaning the holder doesn’t pay tax on the interest earned, which increases the demand for the bonds and lowers the amount of interest the issuer pays.
I hate to sound like a rube, but does taxable simply mean the opposite of tax exempt, and if so, what percentage of state-issued debt is taxable? Also, what are the reasons Illinois would issue taxable debt (and thus pay more interest to sell them) rather than tax exempt debt?
Steve? Rich? This is too long to Google…
- steve schnorf - Friday, Feb 11, 11 @ 3:12 pm:
47, as a quick and easy general rule, longer term capital projects can be done tax-free, and shorter or longer term operating expenses can’t. There’s a lot more to it than that, but it covers most eventualities.
- 47th Ward - Friday, Feb 11, 11 @ 3:13 pm:
Thanks Steve. That makes sense.
- wordslinger - Friday, Feb 11, 11 @ 3:19 pm:
47, before the Rosty-Reagan Tax Reform of 1986, virtually all state and local government debt was tax-exempt, meaning all earnings for investors were shielded from the tax man.
It led to an awful lot of abuse, with a lot of revenue bonds for private activity — sports stadiums, private urban renewal, etc. — being run through government entities to be more attractive to investors, while depriving the Treasury of a lot of money.
In the early 80s, the spread between tax-exempt government borrowing and earnings that could be me made in relatively secure private markets was so large, governments were borrowing money for no real purpose and investing it just for the arbitrage.
It was a sweet deal while it lasted.
- CircularFiringSquad - Friday, Feb 11, 11 @ 3:25 pm:
BTW those cheering for Chubs Christie to lure IL biz to NJ should be happy to know he just gave a $261 million tax give away to a nearly bankrupt casino in Atlantic City
- Siuprof - Friday, Feb 11, 11 @ 3:28 pm:
The situation with Amazon and Texas is different than the Amazon tax passed in Illinois. They had a brick and mortar and employee presence in Texas, so sufficient Nexus to require them to collect sales tax on sales to Texas residents. The pending Illinois bill, based on a New York statute relies on click through referrals by Illinois residents to create sufficient Nexus to require Amazon and other Internet sellers with no physical presence in the state to collect sales tax on sales. Shipped into Illinois.
- 47th Ward - Friday, Feb 11, 11 @ 3:32 pm:
Thanks Word. I understand the potential problems with arbitrage, but the rest of your post sounds like what the IFA does now on behalf of nonprofit 3rd parties. Although I understand there is renewed federal interest in ending that too, it still helps attract cheap capital for needed projects that provide some benefit to the state.
- wordslinger - Friday, Feb 11, 11 @ 3:41 pm:
In the real world, if you have enough pull in Congress, you can get exceptions for tax-exempt financing for virtually anything. In 1986, the “transition rules” of exceptions were as long as your arm.
There’s a reason that Tax Code is so long and garners so much attention from those in the game.
- wordslinger - Friday, Feb 11, 11 @ 3:44 pm:
Adding, if you can wrap “public purpose” around something, it helps. But it’s a complex code with a lot of hands in the kitchen.
- Leatherneck - Friday, Feb 11, 11 @ 4:03 pm:
Cassandra,
I think it was FY 12 that the no-layoff agreement with AFSCME lasted through (until June 30, 2012). I wonder if because of this agreement if it will be the budgets of the constitutional officers (e.g. SOS, AG, Treasurer, Comptroller) whose union workers are NOT covered under AFSCME (and instead the likes of SEIU, IFT, Teamsters, etc.) that could bear the brunt of the cuts this year.
- nieva - Friday, Feb 11, 11 @ 4:12 pm:
Pat Quinn talks about a thousand less jobs on his watch but what he fails to mention is the thousands of temp. employees that the state has hired under his and Rod’s watch. I know one state highway team section that have almost as many temps. as they have full time help. They play the political game with these jobs and have allowed the temps. to join the union. This allows the same folks to be hired each year and they keep telling them that they will be hired next. When it came time to hire full time help in the district none of the hires were from the temp. group.
- Abandon Ship - Friday, Feb 11, 11 @ 4:16 pm:
If you enjoy Tootsie Rolls, it is worth acknowledging that the Chicago based candy company is still here because Rostenkowski provided the business with tax breaks.
- 47th Ward - Friday, Feb 11, 11 @ 4:24 pm:
nieve, maybe you and Cassandra should consider moving to Wisconsion. You both might be happier there.
http://www.chicagotribune.com/news/chi-ap-wi-budgetwoes-nation,0,771747.story
- Bill White - Friday, Feb 11, 11 @ 4:45 pm:
More details on developing WI story here:
http://www.jsonline.com/news/statepolitics/115911379.html
- wordslinger - Friday, Feb 11, 11 @ 4:48 pm:
==Insuring $10 million of Illinois debt against default cost $260,000 a year yesterday, down from $357,910 a year on Jan. 6. The cost of insuring corporate debt from BellSouth Corp., rated two levels below Illinois, was just $31,060 yesterday.==
So much for the rationality of unfettered free markets.
In unregulated CDS, the cost of insuring a higher rated sovereign government that’s never missed a payment in nearly 200 years is higher than lower rated corporate debt.
Not that anyone is actually selling or taking out insurance on Illinois debt. The vast majority are naked swaps and everyone is betting the movement of the number — which has as much economic signifigance as betting on whether the Smails kid picks and eats it in “Caddyshack.”
But the spread does affect the market for selling the debt. Which makes the muni hysteria whippped up by elements of the financial press so crucial and so curious.
- wordslinger - Friday, Feb 11, 11 @ 4:53 pm:
New “reality” show: “Walker: Cheesehead Ranger”
–The governor also said the National Guard is at the ready to take control of state prisons if correctional officers strike or take job actions. No union official has endorsed such a job action, but Walker said he was prepared for any contingency.
The Capitol news conference where Walker announced his plan had unusually high security, with four Capitol police offers stationed outside of it and checking on who was attending the event.
- wordslinger - Friday, Feb 11, 11 @ 5:03 pm:
“Escape from Wisconsin?”