Consequences of failure
Friday, May 29, 2015 - Posted by Rich Miller
* Bloomberg looks at how the Statehouse impasse is impacting state bonds…
Yields on the state’s 10-year obligations reached a 16-month high of 4.17 percent last week, data compiled by Bloomberg show. The spread was about 1.8 percentage points above benchmark debt, the widest since December 2013.
Debt from Illinois has lost about 1.3 percent this year, while the entire municipal market is about flat, Barclays Plc data show. […]
“I don’t see how this credit does not get downgraded within the next two months,” said Paul Mansour, head of municipal research in Hartford, Connecticut at Conning, which oversees $11 billion in munis for insurance companies.
Trading in Illinois bonds suggests the municipal market is moving in that direction. Federally tax-exempt general obligations maturing in March 2032 traded Thursday for an average yield of about 4.9 percent. In comparison, a Bank of America Merrill Lynch index of BBB general obligations due in about 17 years has an effective yield of 4.85 percent.
* Meanwhile, in Chicago…
In a measure of how serious Chicago’s financial woes have become, the city will pay unusually high interest rates on a $674 million borrowing deal reached Wednesday — the first since a major debt rating agency lowered Chicago’s creditworthiness to junk status this month.
A Tribune analysis estimated Chicago is paying at least $70 million more to borrow the money than if the city were rated at the higher level it was just 15 months ago.
- CharlieKratos - Friday, May 29, 15 @ 10:18 am:
It sure seems like the gov is trying to drive down the value of Illinois just so he can purchase it for a cheap price.
- Frenchie Mendoza - Friday, May 29, 15 @ 10:21 am:
Rauner mentioned — and I forget the source — that things must be reduced to rubble in order to build them back up.
That’s exactly what he’s doing.
- CharlieKratos - Friday, May 29, 15 @ 10:24 am:
I just wish he wouldn’t bury the middle class in the rubble.
- 47th Ward - Friday, May 29, 15 @ 10:29 am:
As soon as the income tax rate dropped from 5% to 3.75% on January 1, the outlook has been negative. Barring a last minute revenue deal, yeah, we’re almost certainly looking at a downgrade.
Chicago just paid what, $60 million extra to borrow some dough? The extra vig is going to add up quickly for the state. And there’s no end in sight.
- Angry Chicagoan - Friday, May 29, 15 @ 10:34 am:
I wish the legislative Democrats had ignored Rauner and raised taxes anyway. I realize that in the CYA political culture of Illinois, that’s not what you do, but the fact that it was not done ultimately plays into the hands of Rauner, and whoever is drawing interest on Illinois bonds, and basically nobody else.
- A guy - Friday, May 29, 15 @ 10:34 am:
…and there’s not a thing we can do about it.
Except, yes there is. Thinking it might be a good time for the guys with the most to lose to start talking about fixing things.
- Norseman - Friday, May 29, 15 @ 10:34 am:
Which response do we expect from our elected leadership?
a) Heed this warning and try to prepare a budget plan that will have sufficient revenue and cuts to demonstrate stability in Illinois finances.
b) Rejoice that a further downgrade will exacerbate the crisis so they can leverage their own agendas.
- Shemp - Friday, May 29, 15 @ 10:36 am:
Yes, this is all on the head of Governor of less than one year. Especially the City of Chicago problem. Yeesh.
- A guy - Friday, May 29, 15 @ 10:38 am:
Yep it was all ducky until Jan. 2015. Oy.
- Frenchie Mendoza - Friday, May 29, 15 @ 10:39 am:
What I find astonishing — and a testament, I think, to Rauner’s inability and refusal to understand how governing differs from business — is that these downgrades are looked upon as a badge of honor — proof that Rauner is doing the right thing.
It’s like Rauner — and, apparently, all his loyal, bought-and-paid-for legislators — are living in Opposite-Land. If employment goes down, it’s proof that reforms are needed. If bonds are downgraded, it’s proof they’re doing the right thing. If thousands and thousands of employees strike, it’s about time. 40 years without a strike is a bad thing.
- anon - Friday, May 29, 15 @ 10:40 am:
70,000,000.00 MORE!
- Rich Miller - Friday, May 29, 15 @ 10:40 am:
A guy, it wasn’t great, but at least the state had lots more cash coming in. That tax cut was huge. And that’s on him.
- OneMan - Friday, May 29, 15 @ 10:40 am:
Yeah, because this is all a Bruce plan to buy the state…
- Frenchie Mendoza - Friday, May 29, 15 @ 10:41 am:
I mean, “unemployment goes down”. Oops.
Opposite land.
- OneMan - Friday, May 29, 15 @ 10:41 am:
So I guess the solution it seems most of you want is..
Raise taxes (ideally on other folks however) and keep spending like we are now and not change anything else…
Am I missing something?
- walker - Friday, May 29, 15 @ 10:43 am:
It is what it is. And it improves only with better ability to pay. At least some more tax revenue must be included in the solutions for these cases.
Better an analyst watching the actual market performance predicting a downgrade, than relying on the brilliance of the rating agencies.
- Chris - Friday, May 29, 15 @ 10:46 am:
Rich, you run an extremely biased, one sided blog, and your viewership/commentators really reflect that. See above. Please consider bringing some balance in here. Why not at least try to have some diversity of opinion in here? Why would anyone center or right-of-center want to visit and read the comments in this blog?
- 47th Ward - Friday, May 29, 15 @ 10:49 am:
===Am I missing something?===
Don’t be so thick OneMan. Here’s the outline, typed slowly just for you:
In the short term: Return to the 5% rate, make the required pension payments, make sensible cuts in other state spending.
In the longer term: Modernize the tax structure, streamline and improve delivery of basic government services, manage for results especially in criminal justice/public safety, invest in infrastructure and education, continue to provide essential services to most vulnerable populations.
Duh. Where exactly do you see anyone here saying Illinois shouldn’t change anything else?
- Andy S. - Friday, May 29, 15 @ 10:50 am:
At some point, states need to disavow the Grover Norquist pledge and raise taxes. New York State has consistently had the highest tax burden in the country, and its GO bonds are rated AA+ by all of the major agencies. California three years ago was very similar to Illinois, with major budget problems. The voters there approved a constitutional amendment in November 2012 that resulted in a massive income tax increase, mostly concentrated on the wealthy. Subsequently, California GO bonds have been upgraded by all three rating agencies - its S&P rating, for example, rose from A- to A+.
- Archimedes - Friday, May 29, 15 @ 10:50 am:
Whos beginning to think that Rauner insisted on no extension of the tax rate, not because he thought he could balance the budget without it, but because he needed the leverage of this financial crisis. If the tax rate was extended, no need to pass any of his Turn Around agenda in order to get him to agree to more revenue.
- Norseman - Friday, May 29, 15 @ 10:52 am:
=== Rich, you run an extremely biased, one sided blog, and your viewership/commentators really reflect that. See above. Please consider bringing some balance in here. Why not at least try to have some diversity of opinion in here? Why would anyone center or right-of-center want to visit and read the comments in this blog? ===
Yeah, Rich. You need to do a better job reviewing the applications to become a blog commenter to see what their political affiliations are. Darn, we need more Raunerbots on the blog.
- MrJM - Friday, May 29, 15 @ 10:54 am:
“Why would anyone center or right-of-center want to visit and read the comments in this blog?”
To get an education?
– MrJM
- Nick Danger - Friday, May 29, 15 @ 10:55 am:
“Consequences of Failure” means the previous governor and current super-majority leaders took half-measures when they had ample opportunity to take full measures. Political decisions trumped good governance. Period.
- Anonin' - Friday, May 29, 15 @ 10:57 am:
Ok little confusing
Rate 4.17
IL 4.9
Triple B 4.85
- Patty - Friday, May 29, 15 @ 10:57 am:
I am conservative & Rich allows you to voice other opinions. He may respond negatively to it but this blog offers good information. I believe rauner is shouldering too much blame on some points here but he sure hasn’t done much I can support on the other hand.
- AmericanPie - Friday, May 29, 15 @ 10:59 am:
As for the comparison to New York state tax rate and bond rating: pls note that NYC has the highest person income tax burden in the state, and the greatest degree of income inequality, with 46% living at or near the pverty line.
- Roamin' Numeral - Friday, May 29, 15 @ 11:00 am:
Paying additional interest is not fiscal conservatism. Please discuss increasing revenue. Pretty please.
- Team Sleep - Friday, May 29, 15 @ 11:02 am:
Rich - to quote Willy, “With respect…”
I find it humorous that the House and Senate Dems were willing to acquiesce to Governor-elect - not even Governor-yet - Rauner on something as huge as allowing the 5% rate to sunset and now are refusing to give him anything. Sorry, but that just smacks of doing everything they could to set him up for either abject failure or, at the very least, a pock mark on his first session and CEO of Illinois.
National Dems and especially Illinois Dems were FURIOUS when people like Senators Kirk and McConnell admitted they wanted President Obama to be a one-term president. The humanity! But it sure as heck seems like the state Dems and especially every Dem on this site is espousing the same line of rhetoric and angst towards Governor Rauner.
I get it. His beliefs are different than yours. But he won. Just like Madigan held onto all of his seats and just like Cullerton kept a very solid super majority. Gridlock.
- Give Me A Break - Friday, May 29, 15 @ 11:02 am:
Chris: I’m thinking you must be new around here and missed the Blago and PQ days.
- Chris - Friday, May 29, 15 @ 11:09 am:
I am not saying that Rich should screen commentators. I suppose it has just happened naturally when you are sympathetic to one side and opposed to another that everyone all ends up sounding the same in the end.
Very interested in politics and one of the most interesting political times in Illinois history is before us and I have my popcorn ready, but this blog and the comments sound like AFSCME meets Occupy Wall Street. If you don’t want to have diversity of opinion in here, and if the only solution is to keep things the same and raise taxes on everyone, so be it I guess. To each his own.
- Judgment Day - Friday, May 29, 15 @ 11:10 am:
“Rauner mentioned — and I forget the source — that things must be reduced to rubble in order to build them back up.
That’s exactly what he’s doing.”
—————–
When you do drive-by analysis, everything gets reduced to it’s lowest common denominator. Doesn’t mean it’s correct.
IF you want to have a real understanding of what is happening (at least for the City of Chicago and CPS - and eventually, Cook County), read the following analysis:
https://medium.com/@munilass/what-chicago-s-fiscal-emergency-says-about-the-quality-of-credit-analysis-in-the-municipal-bond-ba1a9727a503
An excerpt from the link to be seriously considered:
“The median per capita aggregate unfunded actuarial accrued pension liability for the largest US cities and Puerto Rico is $3,350. The City of Chicago’s is $7,149.
Most municipal market analysts assume that the city will address its unfunded pension liabilities and relatively high debt burden by increasing residents’ property taxes by nearly 50%.
Chicago officials have been unwilling to raise property taxes for at least a decade. Offering documents indicate that this attitude continues. The city is currently in negotiations with its police and fire unions to postpone transitioning from a system of arbitrary contributions to actuarial contributions (i.e., contributions that reflect the true cost of benefits).
If officials lack the political will to raise taxes when their bonds are trading at 300 basis points (3%) over the AAA benchmark, will there ever be a resolution short of insolvency? This is a material risk that should not be shrugged off.”
—————
As a point, it’s a Nuveen Investments study that indicates a 48.8% increase in City of Chicago property taxes on a $400k residence. And it looks to be pretty solid work.
Here’s some numbers for you. IF you have a tax increase for the 3 most affected tax districts (City of Chicago; Chicago Public Schools, and Cook County government), that means an increase in taxes of $3355 per year in RE taxes (for just those 3 tax districts).
$6,873 (current) increased to $10,228 = $3,355 increase.
Link is: http://www.nuveen.com/Home/Documents/Default.aspx?fileId=65879
That $3,355 annual increase is really going to hurt the value of the average $400k residence. If you capitalize that increase at 8.5% ($3,355/.085 = $39,823.52, say rounded to $39,000), that means you can expect to see up to a $39,000 loss in market value for the average $400k property.
You increase the annual ‘operating expenses’ for the property, that means it’s harder to get qualified for the higher mortgage amount.
So you either tell the potential buyers to come back with more money (there goes that sale…), or there’s a price ‘adjustment’, or you have some other type of ’special financing’. Pick your poison.
What you gonna do?
In short, the State of Illinois has options.
Chicago, CPS, and Cook County - not so much.
- Oswego Willy - Friday, May 29, 15 @ 11:14 am:
At what point do Raunerites feel Rauner should take responsibility?
For example, Rauner, personally, publicly, even privately to the Four Tops asked that the tax rate drop back.
How that isn’t on Rauner, I’ll wait for @statehousechick to find a way to say it’s MJM and Cullerton’s fault.
- forwhatitsworth - Friday, May 29, 15 @ 11:15 am:
If Chicago has to pay $70 million to borrow, we know who the losers are, but who are the winners?
- Six Degrees of Separation - Friday, May 29, 15 @ 11:28 am:
if the only solution is to keep things the same and raise taxes on everyone, so be it I guess. To each his own.
Most people with a clue on the left, center or right agree that some measure of the 2nd (raising taxes or other revenue) is necessary because of the hole the state is in. People do disagree here about the degree and nature of what’s needed in the 1st (keep things the same or change the structural way of doing business). On this, I see a good bit of discussion here from several viewpoints, although I agree a majority of posters here have their favorite programs that “can’t be cut”.
- Rich Miller - Friday, May 29, 15 @ 11:30 am:
===Please consider bringing some balance in here.===
Um, you want me to go out and recruit commenters?
Don’t be daft.
- walker - Friday, May 29, 15 @ 11:30 am:
== if the only solution is to keep things the same and raise taxes on everyone, so be it I guess. ==
That would be a minority position among commenters on this blog. Most, if I have been reading the correctly, favor both cuts and tax revenues to close a $6B gap short-term. That’s been my position.
On this specific issue, the bond ratings, the ratings agencies themselves called for more tax revenue as part of the solutions needed to improve ratings.
As I am sure you are aware, the structural changes we need, including Rauner’s turnaround agenda, and any desire for lower taxes, have delayed and much longer-term fiscal impacts, and should be argued in that context.
- Rich Miller - Friday, May 29, 15 @ 11:31 am:
===an extremely biased, one sided blog===
Where in this post did I blame anyone on the right for the problem? The headline speaks for itself.
- MrJM - Friday, May 29, 15 @ 11:37 am:
“if the only solution is to keep things the same and raise taxes on everyone”
As suggested by no one…
– MrJM
- Judgment Day - Friday, May 29, 15 @ 11:42 am:
“If Chicago has to pay $70 million to borrow, we know who the losers are, but who are the winners?”
—————–
Status Quo. There’s actually a whole group of ‘winners’ - only in the sense that things don’t come crashing down all around them.
Let’s see….
- Credit rating agencies
- The Real Estate market
- The bond houses / investors in Muni’s.
- Public Sector unions
- Much (not all) of the Democratic party (certainly in the Chicagoland area).
- A fair portion (not all) of the Republican party (certainly in the greater Chicagoland area).
- Political leadership across the board.
Btw, $70 mil to borrow isn’t the real problem. It’s in the after effects from that $2.2 bil incurred with the technical default from the Moody’s Investor Services downgrade of Chicago out of investment grade territory.
That’s not settled yet, but supposedly the City’s going to get a solid (kinda sorta) from the bond holders, but it’s going to be a super short leash they’re going to be on. Life looks like it’s going to get hard…..
- anon - Friday, May 29, 15 @ 11:48 am:
Team Sleep— Many here take this position: If their team hits the receiver a full second before the ball arrives, it is a clean play. If the opposing team is five feet from their receiver, it is pass interference.
Homerism!
- A guy - Friday, May 29, 15 @ 11:52 am:
=== Rich Miller - Friday, May 29, 15 @ 10:40 am:
A guy, it wasn’t great, but at least the state had lots more cash coming in. That tax cut was huge. And that’s on him.===
Fair enough, that explains a downgrade 5 months ago. Less money and no solutions led to several more. Is is all on him? Or does past history affect future results?
- A guy - Friday, May 29, 15 @ 11:56 am:
+++ Rich Miller - Friday, May 29, 15 @ 11:31 am:
===an extremely biased, one sided blog===
Where in this post did I blame anyone on the right for the problem? The headline speaks for itself.++++
In this case, and I stress “in only this case”, allow me to serve as ‘Individual A’ in your response. lol
- Juvenal - Friday, May 29, 15 @ 11:58 am:
Chris:
The longtime commenters here are pretty one-sided.
The “steeped in reality” side.
Fantasy solutions here, whether it is the notion that the FY 16 budget can be balanced by eliminating “waste, fraud and abuse” or by implementing a progressive income tax are met with stiff resistance.
Now, if you or anyone else on the “right” or “center right” who thinks the Democratic spending plan is excessive has any specific suggestions for what you would actually like to see cut, please post them here and forward along to leaders Radogno and Durkin. Because neither of them has yet submitted an amendment to reduce the proposed spending by a nickel.
- walker - Friday, May 29, 15 @ 12:04 pm:
@anon 11:43: Thanks, that’s a clever critical note.
Do you have any comment on the topic of the thread?
- Pelonski - Friday, May 29, 15 @ 12:53 pm:
“ow, if you or anyone else on the “right” or “center right” who thinks the Democratic spending plan is excessive has any specific suggestions for what you would actually like to see cut, please post them here and forward along to leaders Radogno and Durkin. Because neither of them has yet submitted an amendment to reduce the proposed spending by a nickel.”
Agree. The Republicans have a logically indefensible position at this point because they say we are spending too much money but refuse to explain where the cuts need to be made. Rauner’s so called “Turnaround Agenda” will have absolutely almost no impact on State finances in the coming year, and there are serious questions about whether they will have any real long term impact. If we passed everyone of Rauner’s Turnaround proposals and his proposed budget, we would still be billions of dollars short of a balanced budget.
- Biker - Friday, May 29, 15 @ 1:04 pm:
Hmm. $70 Mil INCREASE in price to borrow $674 Mil means we are paying about 10.4% more in interest. Umm, at what interest rate are we borrowing? I thought my 8.5% student loan interest was high.
- anon - Friday, May 29, 15 @ 1:27 pm:
Walker, made the comment, using an accurate analogy. Need an explanation?
- Oswego Willy - Friday, May 29, 15 @ 1:32 pm:
My solution was a hybrid of the Topinka idea;
Shoulda kept the 5% tax thru FY2016, by FY2018, have the rollback be completed under these terns;
Cuts and reforms as an agreed structure roll call allows, and allow for Rauner victories in some tort reform and another agenda pillar.
The 5% would NOT be available in FY2017, and FY2018 will see the complete rollback.
Rauner wanted the rollback to stand. It’s on him.
- anon - Friday, May 29, 15 @ 1:57 pm:
Well, the national economy just experienced a negative growth first quarter. Let that sink in. After all the prop ups, all the money thrown at things to keep interest rates artificially low, the economy couldn’t even get into postive growth territory.
For every $50K earned, a person just gained $625 from lower state income taxes, money they can spend to spur an obviously ho-hum economy. I don’t expect the left to understand this concept, because you feel money in the hands of the government is better than money in the hands of the taxpayer.
- walker - Friday, May 29, 15 @ 1:58 pm:
@anon: Yes, you commented cleverly and generally on the other commenters. That’s your usual schtick.
Again — Do you have a comment on the topic of the thread: consequences of failure, bond ratings and costs to the state?
- walker - Friday, May 29, 15 @ 2:03 pm:
@anon: So sorry I missed your 1:57 post before I commented above.
That’s the kind of thing I was looking for and thank you for it.
- anon - Friday, May 29, 15 @ 2:31 pm:
You are welcome. Have a great weekend.
- Andy S. - Friday, May 29, 15 @ 3:59 pm:
Once upon a time, believing in balanced budgets rather than deficit spending, and raising taxes when fiscally prudent, was considered a center-right position. Margaret Thatcher was aghast at the deficits Reagan ran early in his first term. Apparently Reagan himself was as well, because he quietly reversed course and allowed tax increases later in his first term and during his second term. Has the needle moved so far that even Thatcher and Reagan would be considered leftists by today’s Republican party?
- RNUG - Friday, May 29, 15 @ 7:37 pm:
== Why would anyone center or right-of-center want to visit and read the comments in this blog? ==
-Chris-, both sides are represented here but you better be able to back up your statements with hard data. You might not think so but I tend to be to the right of center on a lot of things, especially fiscally, but I also temper that with other considerations. In case you are new and don’t realize it, my full handle is Retired Non-Union Guy aka RNUG. Over all I’m probably more of a Libertarian than a dyed in the wool GOP and even a Tea Party type on some issues. And I think it’s safe to say most the community here on both sides reads and respects my comments without necessarily agreeing with them.