Before the fall
Wednesday, Jan 20, 2016 - Posted by Rich Miller
* Greg Hinz…
According to an analysis released today by the institute, $53 million is the “penalty” the state paid when it sold $480 million in general obligation bonds last week.
Specifically, it’s how much the state garnered from the sale compared with how much it would have netted in 2006, before the state’s credit rating repeatedly had been lowered.
Here’s how bond sales work: An interest rate is set, but then buyers bid for how much they’re willing to pay to get that return, effectively raising or lowering the price. Last week’s sale netted prices ranging between 98 percent and 114 percent of par value, depending on time to maturity. But the state got 104 percent to 127 percent of par value a decade ago. The difference between the two is $53 million, roughly $568 million for the state versus the $515 million we actually got.
Last week’s GO sale was the first since Gov. Bruce Rauner and House Speaker Mike Madigan went to war over the budget, tax hikes, the governor’s “turnaround Illinois” agenda, etc. But it won’t be the last. And if the standoff continues, the penalty could double on future sales, says study author Martin Luby, an institute visiting scholar from DePaul University.
Rod Blagojevich was governor in 2006, the benchmark for this study. The economy wasn’t great, but it was fairly decent. Blagojevich and Speaker Madigan started warring with each other right after Blagojevich was reelected and the feud didn’t end until early 2009. Because of this, the state government was totally unprepared to deal with the Great Recession.
Any of this sound familiar?
* From the study…
• The $53 million financial condition penalty estimate only relates to the 2016 Bonds. Assuming that future debt sales will be at typical levels of about $1 billion each year, this financial condition penalty grows to $106 million per year.
• Furthermore, based on recent analyses, the state will need to issue much more annual debt than in the past to address its growing infrastructure needs. A recent estimate of the annual bond amount required to address these needs is $4 billion. At this $4 billion annual bond level, the financial condition penalty estimate grows to $424 million per year.
• Even in the context of the overall state budget, this $424 million is a significant annual amount of money, especially given the dire fiscal straits the state finds itself in today. For example, this $424 million would provide a substantial amount of the extra funding that the Chicago Public Schools is requesting from the state to address its budget deficit.
In other words, the governor’s projected revenue gains from passing his Turnaround Agenda will barely cover the added bond costs as a result of this impasse.
- wordslinger - Wednesday, Jan 20, 16 @ 9:11 am:
–In other words, the governor’s projected revenue gains from passing his Turnaround Agenda will barely cover the added bond costs as a result of this impasse.–
You can’t make this stuff up.
The kicker is, the governor’s “projections” are just pulled out of thin air. Yet they still confirm the insanity of his hostage “strategy.”
- Oswego Willy - Wednesday, Jan 20, 16 @ 9:16 am:
===In other words, the governor’s projected revenue gains from passing his Turnaround Agenda will barely cover the added bond costs as a result of this impasse.===
The payoff is…
The decimating of Unions and ensuring that collective bargaining and prevailing wage.
There is no financial gain to the Turnaroubd Agenda.
Period.
End of discussion.
- Frenchie Mendoza - Wednesday, Jan 20, 16 @ 9:18 am:
The scary part of this isn’t (a) Rauner’s thin-air numbers or (b) this extra $424M — it’s that Rauner’s superstars didn’t take this into account when plucking their numbers out of thin air.
Surely they knew this was coming? And surely — if you were going to air-pluck data — you’d pluck deep enough to account for all the as-yet-undisclosed stuff coming down the pike?
I mean, that’s fictionalized data 101. If you’re gonna make a fiction, you gotta make it good — and then you gotta make it smart.
- Oswego Willy - Wednesday, Jan 20, 16 @ 9:19 am:
The decimating of Unions and ensuring that collective bargaining and prevailing wage both end.
- Norseman - Wednesday, Jan 20, 16 @ 9:20 am:
Killing unions at any cost is Rauner’s objective.
- Century Club - Wednesday, Jan 20, 16 @ 9:21 am:
This should be the lead item when discussing Rauner v. Madigan. Rauner’s cost/benefit analysis is out of whack even for his own side.
- Anon221 - Wednesday, Jan 20, 16 @ 9:28 am:
OW- “There is no financial gain to the Turnaround Agenda.”
****
Maybe not in the Agenda itself, but the EXECUTION (and that word has many meanings in this case) of the Agenda will have profits for some- especially in the bonds sales.
http://illinois.municipalbonds.com/bonds/general_obligations/
http://www.bondsonline.com/Search_Quote__Center/Municipal_Bonds/Illinois_State_Yield_Curve
- Anonymous - Wednesday, Jan 20, 16 @ 9:29 am:
“compared with how much it would have netted in 2006, before the state’s credit rating repeatedly had been lowered.” / The Quinn and Madigan legacy lives on. How many times did their fiscal stewardship lead to those credit rating reductions? 10?
It had happened once under Rauner, so he is responsible for 1/10 of this. The other 9/10 of this “penalty” are a gift from Quinn and Madigan.
- Ay Caramba! - Wednesday, Jan 20, 16 @ 9:34 am:
This is a completely ridiculous article by Hinz.
Does anyone here actually believe that those bond prices hadn’t moved dramatically against the state of Illinois long before Rauner was elected?
Did Hinz forget about all the credit downgrades that occurred during the Blago/Quinn years? The explosion of state and local pension landlines all over the place? Has Greg Hinz never looked at the history of bond prices to see when these moves actually happened?
- Ay Caramba! - Wednesday, Jan 20, 16 @ 9:40 am:
Whoa, Rich, when you say Rauner’s budget gains “will barely cover the added bond costs as a result of this impasse” what budget timeline and added bond costs are you referring to?
Added bond costs that have occurred since Rauner took office or added bond costs since 2006?
- Anonymous - Wednesday, Jan 20, 16 @ 9:48 am:
Being a resident of Chicago, I just think of $53 million as 11.25% sales tax on top of a $480 million sale.
It’s just like Illinois is doing some shopping in Chicago!
- sideline watcher - Wednesday, Jan 20, 16 @ 10:26 am:
Ay Caramba!
Blago is gone. Quinn is gone. Rauner ran on the failures of past Governors. He’s the Governor now. The state is worse than its ever been in JUST THE LAST 12 MONTHS! That’s a hell of a turnaround! I mean for a guy who says he’s smart about money, he’s awful at math.
I know its hard to accept facts that go against your ideology. It truly doesn’t matter when it started. The Governor of our state today has a fiduciary responsibility to our state TODAY.
- Anon221 - Wednesday, Jan 20, 16 @ 10:27 am:
Another study on the TurnAround-
http://chicagoist.com/2016/01/19/big_banks_get_big_bucks_during_illi.php
- Ay Caramba! - Wednesday, Jan 20, 16 @ 10:55 am:
That’s a completely nonsense argument.
Put whatever you want from the last year on Rauner, but to pin on him credit downgrades that started a decade ago along with the pension explosions that began more than a decade ago, and on top of that the 2007-2009 Great Recession and Illinois’ response to it, shows complete financial illiteracy. Your post is basically just saying “I’m clueless about how the financial world works.”
And to be specific, there are legislators of some influence who have been around to watch the whole cycle of downgrades, pension explosions, and Illinois’ response to the GR.
- Ay Caramba! - Wednesday, Jan 20, 16 @ 10:57 am:
Sideline watcher the above message was for you
I should have clarified that in message.
- sideline watcher - Wednesday, Jan 20, 16 @ 11:13 am:
Put whatever you want from the last year on Rauner, but to pin on him credit downgrades that started a decade ago along with the pension explosions that began more than a decade ago, and on top of that the 2007-2009 Great Recession and Illinois’ response to it, shows complete financial illiteracy. Your post is basically just saying “I’m clueless about how the financial world works.”
My post was about the last 12 months. The last 12 months that completely undid what took nearly 5 years to crawl back from. The last credit downgrades didn’t refer to anything other than Illinois’ current fiscal condition as a result of the lost revenue from the income tax rollback and the political impasse making it impossible to fix.
As for your point about legislators who were there, Governor Rauner ran on a platform of Quinn failed. Its been a year now. What exactly has Rauner won?
I’m not the one who is clueless or selectively ignoring facts. As our friend OW says, Governor’s OWN. Is Illinois better off today than it was the day Rauner was sworn in? The answer to that is a resounding NO. All in the last 12 months.
- Anonymous - Wednesday, Jan 20, 16 @ 4:40 pm:
Governors can’t own the decisions and downgrades of their predecessors.
Unless you believe in magic.
- Levois - Wednesday, Jan 20, 16 @ 5:38 pm:
So basically in bringing up Blago, we’re headed towards that territory again and Rauner and Madigan needs to grow up.