7 Comments - wordslinger - Thursday, Jun 28, 18 @ 10:34 am: –State debt service peaks this year at $4.4 billion– And the mooks at the rating agencies claim that the state’s credit rating is near junk, like there’s a chance it can’t cover that nut? GRF, with no federales money, is projected at more than $37B for FY19. The bondholders get first crack, by law. With debt service at $4.4B, that’s more than eight-times coverage. With that bond debt and that GRF revenue, the chance that the SOI would miss a debt service payment is zero. Which, if you noticed, when Rauner was driving the backlog of unpaid bills up to $16B, the bondholders still got paid on time, in full. If you don’t miss a debt service payment under those circumstances, when would you? The rating agencies are an anachronistic joke. - Chris Widger - Thursday, Jun 28, 18 @ 11:15 am: ==If you don’t miss a debt service payment under those circumstances, when would you?== I truly don’t disagree with your analysis of the State’s ability to cover its short-term obligations. My question, though: If these agencies are just completely wrong, then what’s going on? Are they just using bad assumptions that are widespread in the industry, and a different rating agency with a different methodology could more accurately capture the credit ratings of government entities? Does the whole model just break down for governments? Or are you suggesting the approach is an insidious one meant to destabilize trust in the stability of government finances, either for economic or political ends? Why is this phenomenon happening, and why do news agencies rely on the rating agencies rather than call them out? - BlueDogDem - Thursday, Jun 28, 18 @ 11:18 am: There’s that free market principled,fiscal conservative governor again - wordslinger - Thursday, Jun 28, 18 @ 11:53 am: –My question, though: If these agencies are just completely wrong, then what’s going on? – I don’t know. They rate the fiscal practices of government entities and not the actual risk of default. They are not one and the same, but they sell it that way. The great Steve Schnorf said it was crazy that any private paper could carry a AAA rating while the SOI, a going concern with sovereign taxing power and an unblemished record of payment on bonds, would be rated lower. He was proven right many times, of course, most famously with subprime MBS. Old Schnorf was right most of the time. Geez, I miss that cat. - DarkDante - Thursday, Jun 28, 18 @ 12:13 pm: –My question, though: If these agencies are just completely wrong, then what’s going on? – I don’t know. – I enjoyed your analysis, and agree largely about the relatively small impact that bonds have on SoI’s fiscal health. But bonds aren’t the only out-of-control financial expense incurred by the State. The true issue, as we all know, is in the pension system. Bond payments are regular and easy to plan for, while pension payments depend upon both revenues (amounts paid in by current employees), expenses (the pension paid out by the fund), as well as investment returns on pots of money. The final piece of of great importance, as the SoI currently estimates that the return on pension portfolios will be 7%. This rate was common pre-recession, but has been difficult to consistently achieve since then. By assuming a rate of reinvestment much higher than will (probably) be obtained, the SoI minimizes the pension problem. As pension payments go up over time (see revenue, expense, return discussion above), these payments can crowd out other governmental priorities, and even create a vicious cycle where disinvestment leads to lower state revenues, leads to more crowding out, leads to etc. etc. Not saying it’s gonna happen, but the ratings agencies have definitely been weighing this heavily in their models. - wordslinger - Thursday, Jun 28, 18 @ 12:46 pm: DD, I’m familiar with the Gospel According to Ty. Still has nothing to do with bond creditworthiness today. By the way, how many times has the state been late on pension checks? When are you estimating the pension funds will go broke. Twenty years? Thirty years? Never? Pension mania is a fiscal issue like Janus is a free speech issue. You can sell it to the weak, but I ain’t buying. - Deadbeat Conservative (Blocked Yet?) - Thursday, Jun 28, 18 @ 12:59 pm: –My question, though: If these agencies are just completely wrong, then what’s going on? – They rated Enron and subprimes AAA because some paid them to do it. Is GRTC & Co buying IL GO bonds? Sorry, comments for this post are now closed.