Chaos is not a plan
Wednesday, Apr 3, 2013 - Posted by Rich Miller
* This sort of thinking about state finances really bothers me…
Some people apparently believe in magical fairies. You can’t just wish away the desire of investors to make money. Illinois has one of the strongest bond payment guarantee laws in the entire country. Smart bond buyers know they’re gonna get paid. And since Illinois’ fiscal troubles have driven up the state’s interest rates, savvy investors want to make some money.
Hoping for total chaos is not a plan. And it’s really, really wrong-headed.
* It would be nice, however, if Illinois could follow California’s lead and start getting itself out of this fiscal mess…
Buyers awaiting progress on plans to overhaul the worst- funded state pension system demanded about 1.33 percentage points of extra yield above benchmark munis for 10-year tax- exempt debt that Illinois sold yesterday. That’s almost triple what California had to pay last month.
To raise public awareness of the pension burden, Democratic Governor Pat Quinn released a video in November showing a cartoon of “Squeezy the Pension Python” threatening to strangle the capitol building in Springfield.
To raise public awareness of the pension burden, Democratic Governor Pat Quinn released a video in November showing a cartoon of “Squeezy the Pension Python” threatening to strangle the capitol building in Springfield. Source: AP/Courtesy of Gov. Pat Quinn’s office
In sales about a year ago, the Illinois yield penalty was only double that of the most-populous state. Since then, Standard & Poor’s has cut Illinois twice, to A-, six steps below AAA, as legislators failed to advance a pension fix. Meanwhile, the company raised California’s credit for the first time since 2006, to A, one level higher, after Governor Jerry Brown, a Democrat, proposed a budget for the year beginning July 1 that would leave the state with its first surplus in almost a decade.
“It’s a different credit situation — California has definitely made some difficult steps,” said Robert Miller, who helps oversee $32 billion of munis in Menomonee Falls, Wisconsin, at Wells Capital Management. He said the company didn’t buy the Illinois offer because the spreads were too narrow. “Illinois at this point is more of the status quo.”
California’s governor is now predicting a surplus. He’s cut and cut and cut again and raised taxes. He’s also been lauded for pension reforms, but those reforms are only for new hires. Illinois did that in 2010.
* Related…
* Illinois bond sale includes pension penalty
- Roadiepig - Wednesday, Apr 3, 13 @ 9:45 am:
The rates are higher than other states but are still historically low. I’m not sure what the folks at Illinois Watchdog would want us to do- completely stop raising money by selling bonds until the pensions ae 100% funded? Stop all infrastructure repairs and upgrades?
- state worker - Wednesday, Apr 3, 13 @ 9:47 am:
There should be a moratorium on stories about blame.
One there is a clear, visible effort for the legislature to stop grandstanding and make this happen, we can blame the ones who oppose it.
And until then, legislators share blame.
- RNUG Fan - Wednesday, Apr 3, 13 @ 9:51 am:
Californias pension guarantee is strong but not as strong as ours . Were ours to break it would threaten every contract that exists and that would be real chaos.
We need a better plan but we do have the ramp now and its really now that has the belt tightening and the whining so its not really kicking the can down the road and while Quinns budget is not great it isn’t apocalyptic.
At this point come back pass it and go away the legislature isn’t making anything better with its circus
- wordslinger - Wednesday, Apr 3, 13 @ 10:08 am:
That Illinois Watchdog is just chasing its tail, betraying a total ignorance of municipal finance and markets.
When are people going to stop buying junk bonds? When are they going to stop investing in the stock market? Those markets are shattering records. Much higher risks there. You balance risk in any portfolio — or should.
Why does California get a much better price although the two state’s experiences are similar? One factor may be a larger in-state market for California debt, with homegrown investors taking a double-barrel on tax-exempt California paper. Given their much higher progressive income tax rates, tax-exempt paper is very atractive.
The other might be that California has gotten a lot more credit in the financial press for its actions than has Illinois. They’ve been selling their story much better than Illinois.
- Downstate - Wednesday, Apr 3, 13 @ 10:10 am:
Just because we got an attractive credit card offer in the mail, doesn’t mean our gross deficit spending is going away.
- Anonymous - Wednesday, Apr 3, 13 @ 10:10 am:
Squeezey’s been spending too much time lately thinking about how tasty a rubber chicken can be. He hasn’t had time to work on legislators.
- Kasich Walker, Jr. - Wednesday, Apr 3, 13 @ 10:11 am:
Wait and see if IL goes the CA route by waiting until the septuagenarian offspring of a former leading state pol takes the helm to raise enough revenues while cutting costs.
If IL pols can keep from selling off public assets perhaps the state could cut some debt issuance costs with a state run debt issuing agency selling lower denominations of discount state bonds.
North Dakota has a successful state run bank — not to finance state debt — with no Dimon’s cashing in.
(See “Why Is Socialism Doing So Darn Well in Deep-Red North Dakota? It’s the Banks” in 3/31/13 Truthout)
- Frenchie Mendoza - Wednesday, Apr 3, 13 @ 10:13 am:
The “chaos plan” does seem to becoming a viable political action point — at least for the GOP. Rauner is certainly pushing for chaos — as in, “total government meltdown” — in order to start from scratch.
It’s interesting, though — at least I find it interesting — that the chaos theory that’s gaining traction in Illinois is the least “business-like” solution out there — as in, “We should run Illinois like a business.” I don’t know many business folk that would advocate a total meltdown in order to reign in costs. It would seem to me that the chaos option is, in fact, the most *expensive* short-term option out there — expensive in terms of lost work and lost productivity and, ultimately, lost dollars — with no guarantee for long-term solvency.
- Leave a Light on George - Wednesday, Apr 3, 13 @ 10:17 am:
=California’s governor is now predicting a surplus. He’s cut and cut and cut again and raised taxes. He’s also been lauded for pension reforms, but those reforms are only for new hires. Illinois did that in 2010.=
It appears then that we need at least one more cut in the cut and cut again category and the income tax raise needs to be made permanent. Perhaps then time and normal growth will take care of things without all the unconstitutional pension reforms being proposed.
- Anonymous - Wednesday, Apr 3, 13 @ 10:24 am:
The biggest difference between the states is that California levies an income tax with higher rates for those with higher incomes and lower rates with those for lower incomes. That’s what Illinois needs.
- Cook County Commoner - Wednesday, Apr 3, 13 @ 10:27 am:
I’m not sure California is doing so well. Apparently, municipal bankruptcies are on the up-tick there. The Stockton, CA bankruptcy appears poised to decide whether federal bankruptcy law can require the municipality to place payments to the state pension fund on the same footing for a haircut as other creditors, contrary to state law. Some commentators suggest that a federal bankruptcy ruling condoning a haircut to pension fund payments (assuming it was affirmed on appeal), would be used by other communities in California and around the nation to get out from under their pension obligations.
- Anonymous - Wednesday, Apr 3, 13 @ 10:35 am:
To put the 3.92% interest rate in context, in the first two years of the IL FIRST capital program IL sold more than $2.5 billion in bonds. In FY 2000, the average interest rate was 5.68% (30% higher than this year’s). In FY 2001 it was 5.03% (22% higher).
- titan - Wednesday, Apr 3, 13 @ 10:39 am:
Cali is projecting good revenues for its budget, but do we have confidence that the predicted revenues will be realized?
- steve schnorf - Wednesday, Apr 3, 13 @ 10:48 am:
Good point on the double-barreled California munis. Along with their higher income tax rates, that gives their bonds after-tax yields quite a boost for high income and institutional investors.
- Caveman - Wednesday, Apr 3, 13 @ 10:50 am:
“Illinois has one of the strongest bond payment guarantee laws in the entire country.”
Illinois also has one of the strongest constitutional guarantees for government employee oensions and look what is being considered in that arena. Nothing is safe when incompetence, big government and runaway spending rule.
- Judgment Day - Wednesday, Apr 3, 13 @ 10:53 am:
California has been to some extent ’solving’ their fiscal problems on the backs of the local tax districts (schools and municipalities in particular).
Illinois has not done that yet, but that’s the trend that is being talked about. So, in that sense, CA is ahead of us.
As has been noted, states cannot enter into bankruptcy. But school districts, municipalities, and Counties can. We may end up seeing CA leading the way in local government bankruptcies.
Maybe something to look forward to here in IL.
- soccermom - Wednesday, Apr 3, 13 @ 11:03 am:
I should know this, but I don’t: What’s a double barrel?
And let us note that the good people of California just passed a referendum raising their own taxes.
- wordslinger - Wednesday, Apr 3, 13 @ 11:12 am:
–I should know this, but I don’t: What’s a double barrel?-
I was referring to the tax-exemption, both state and federal, that California residents would get by investing in California tax-exempt bonds. With their progressive tax rates, that could be very attractive to high income earners, and could explain, in part, why Cally gets a better price in the market.
It also describes bonds backed by a GO pledge and another specific revenue source.
- Joe from Joliet - Wednesday, Apr 3, 13 @ 11:32 am:
… Chaos is not a plan …
Maybe true, but it is what we have been working under for the last 10 years. The improvement(?) is that it is no longer called “demoralized” chaos. “Apathetic” would be a good adjective to use now.
- Bill White - Wednesday, Apr 3, 13 @ 11:33 am:
=== Some commentators suggest that a federal bankruptcy ruling condoning a haircut to pension fund payments (assuming it was affirmed on appeal), would be used by other communities in California and around the nation to get out from under their pension obligations. ===
Don’t IL municipalities owe their pension obligations to the state government rather than retirees? It seems to me that in IL, the bankruptcy discharge of municipal pension obligations would exacerbate the state level problem rather then reduce the state level problem.
- steve schnorf - Wednesday, Apr 3, 13 @ 11:52 am:
Mom, Illinois doesn’t generally exempt our muni bonds interest payments from the state income tax. Some other states do, including Cal. The exception I’m aware of in Il was College Savings Bonds, and I don’t think there have been any of those issued in years.
- Cincinnatus - Wednesday, Apr 3, 13 @ 11:52 am:
Bill,
I think IMRF is one of the better funded accounts. The problems start arising if TRS obligations are assumed by the municipalities, methinks.
- Judgment Day - Wednesday, Apr 3, 13 @ 12:14 pm:
“Don’t IL municipalities owe their pension obligations to the state government rather than retirees? It seems to me that in IL, the bankruptcy discharge of municipal pension obligations would exacerbate the state level problem rather then reduce the state level problem.”
Probably going to find out. CALPERS (at least in the Stockton, CA case) was able (up to 04.01.2013) to avoid even being considered for any type of ‘haircut’, but U.S. Bankruptcy Judge Christopher M. Klein put an end to that. It looks like CALPERS might be Stockton’s largest creditor (maybe not, might be the insurers of all the pension bonds that funded CALPERS pension funding), and now all the different parties are going to be part of the bankruptcy case.
Lots more questions than answers.
The real question is what happens if IMRF (or TRS here in IL) has to pick up the tab for maintaining standardized retiree pension benefits in cases where the federal bankruptcy court approves a reduction in the future retirement funding obligations by a local government as part of a bankruptcy plan.
Here’s a decent summary of the Stockton story:
http://www.bloomberg.com/news/2013-04-01/stockton-can-stay-in-bankruptcy-over-creditor-objections-1-.html
The real issue is going to be San Bernardino bankruptcy filing. They became the first in California to unilaterally stop paying into the California Public Employees Retirement System (Calpers), and the unions who represent these pensioners aren’t happy. Since the city’s bankruptcy hearing is still pending, none of its creditors, Calpers included, are currently allowed to sue for money owed.
Fun times.
- Robert the Bruce - Wednesday, Apr 3, 13 @ 12:17 pm:
California is way ahead of us in pursuing higher taxes on those with very high incomes: 13.3% state income tax on taxable income over $1,000,000, something our state’s Constitution unfortunately doesn’t allow.
Passing along more burdens to the locals, cynically knowing that some will need to declare bankrupcy, and therefore get out of some union contracts, might have been part of their strategy too.
- Rich Miller - Wednesday, Apr 3, 13 @ 12:19 pm:
===But school districts, municipalities, and Counties can.===
Not in Illinois.
- Judgment Day - Wednesday, Apr 3, 13 @ 12:20 pm:
“I think IMRF is one of the better funded accounts.”
Depending upon the source, IMRF (IL Municipal Retirement Fund) is probably a ‘top 10′ nationwide in terms of funding for a pension funds of it’s size. Funding looks to be somewhere in the 81% to 84% range, which is spectacularly excellent. TRS (Teacher’s Retirement System), not so much. Pretty brutal, actually.
- Robert the Bruce - Wednesday, Apr 3, 13 @ 12:21 pm:
==In FY 2000, the average interest rate was 5.68% (30% higher than this year’s).==
Yes, interest rates are lower today than they once were, but that’s out of Illinois’ control. What is in Illinois’ control is how much we pay relative to prevailing interest rates today, and on that metric, we pay more interest to bondholders than any other state because of our failure to resolve the unfunded pension liability. I’m not sure how much this extra interest payment costs the state annually.
- Judgment Day - Wednesday, Apr 3, 13 @ 12:23 pm:
Rich, I’m checking, but I don’t think that IL law can override federal bankruptcy law as it applies to local tax districts.
- Judgment Day - Wednesday, Apr 3, 13 @ 12:26 pm:
I stand corrected.
There is no Illinois state law enabling a municipality to file a Chapter 9 bankruptcy petition.
- Judgment Day - Wednesday, Apr 3, 13 @ 12:27 pm:
Re: “Washington Park, Illinois December 2010.
Washington Park briefly emerged from bankruptcy and then filed a new petition for bankruptcy which was rejected by the judge, who stated there was no Illinois state law enabling a municipality to file a Chapter 9 bankruptcy petition.”
http://en.wikipedia.org/wiki/Chapter_9,_Title_11,_United_States_Code
- Bill White - Wednesday, Apr 3, 13 @ 12:30 pm:
Another way to phrase my question is whether the State of Illinois would be deemed a guarantor of pension obligations owed by a bankrupt unit of local government (assuming IL units of local govt can file bankruptcy - and it appears they can’t).
If the state is guarantor, municipal bankruptcy wouldn’t help anything.
- Rich Miller - Wednesday, Apr 3, 13 @ 12:32 pm:
A federal judge recently forbade a St. Clair County town from declaring bankruptcy.
- Bill White - Wednesday, Apr 3, 13 @ 12:38 pm:
@Robert the Bruce
=== we pay more interest to bondholders than any other state because of our failure to resolve the unfunded pension liability ===
True.
However, one reason IL hasn’t been able to resolve the unfunded pension liability is an stubborn insistence on seeking to enact unconstitutional haircuts.
Resistance to Cullerton’s plan is one example of that.
- Judgment Day - Wednesday, Apr 3, 13 @ 12:38 pm:
The end result of this could be an acceleration of ‘hollowing out’ of finances for units of local government, because there’s going to be an ever increasing competition for limited resources between each government’s pension funding vrs. O&M/capital expenditures.
Ugly.
- Cook County Commoner - Wednesday, Apr 3, 13 @ 1:38 pm:
The Illinois “Local Government Financial Planning and Supervision Act” (50 ILCS 320/) provides an elaborate process for supervision of a local government unit in financial distress. A commission created under this act could deem ch 9 bankruptcy acceptable, but the process appears lengthy and complex before a bankruptcy filing would be allowed.
- Arthur Andersen - Wednesday, Apr 3, 13 @ 1:46 pm:
CCC, any state can pass a law. That doesn’t mean it’s going to supersede the Feds. The “no bankruptcy” question seems to be well settled in Illinois.
- Formerly Known As... - Wednesday, Apr 3, 13 @ 2:21 pm:
=== That’s almost triple what California had to pay last month. ===
And therein lies the root of our problem. Even California has managed to start turning things in a better direction while we… ?
- wordslinger - Wednesday, Apr 3, 13 @ 2:39 pm:
=== we pay more interest to bondholders than any other state because of our failure to resolve the unfunded pension liability ===
Because the rating agencies say so, now that they have religion after their subprime MBS bender.
It begs the question: so what?
Back in the early 80s, Illinois had huge unfunded pension obligations, but was rated AAA. A lot of good that did you, because T-bonds were priced at 12-13%, so you couldn’t go to the market without paying 15% or more.
There’s no better time, ever, to borrow. Which brings us back to our unpaid vendors. Let’s run the numbers, do a 10-year bond with the portion of the income tax increase dedicated for that purpose and pump as much money into the state economy as we can while the gravy is hot.
You put money in people’s hands, they spend it, and lots of good things happen.
- Chris - Wednesday, Apr 3, 13 @ 3:11 pm:
“The “no bankruptcy” question seems to be well settled in Illinois. ”
Yes, seems to be well settled that a recommendation from a commission formed under the “Local Government Financial Planning and Supervision Act” would be the ’specific authority’ necessary for an Illinois municipality to file Chapter 9.
- LisleMike - Wednesday, Apr 3, 13 @ 3:53 pm:
for those of us who remember the Carter years of inflation (19% mortgage interest), the issue of paying off debt in cheaper dollars gets everyone out of the whole except fixed income seniors (remember the stories about eating dog food?) and bond holders. Is there concern that someone is betting on inflation to make this problem go away? (Obviously, I am not an economist and I am probably showing it, but it is a real concern for me)
- foster brooks - Wednesday, Apr 3, 13 @ 7:59 pm:
california taxes the living he## out of pensions even if you live out of state.
- Chris - Thursday, Apr 4, 13 @ 4:30 pm:
“california taxes the living he## out of pensions even if you live out of state. ”
They tax them just like any other inceom ‘earned’ in CA–they only get taxed to ‘the living he##’ because they are typically large. Marginal rate hits 8 at $37k ($74k for couple) and 9.3 at $46k ($92k for couple).
That Illinois exempts pension income from taxation is scandalous.