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Mendoza argues for state credit upgrade

Thursday, May 13, 2021

* Peter Hancock at Capitol News Illinois

Illinois Comptroller Susana Mendoza is asking the nation’s three major credit rating agencies to reconsider the state’s credit rating with an eye toward a possible upgrade.

In an April 28 letter to executives at Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, Mendoza argued that Illinois has virtually eliminated its backlog of past-due bills while keeping current on its bond payments and pension obligations, all in the midst of a global pandemic. […]

Both Mendoza and Gov. JB Pritzker had said in earlier interviews that they wanted to use a portion of the roughly $8 billion in federal relief funds that Illinois expects to receive through the recently-passed American Rescue Plan to pay off the Federal Reserve loans. But new guidelines from the U.S. Treasury Department that were released on Tuesday specifically prohibit using those funds for “payment of interest or principal on outstanding debt instruments, including, for example, short-term revenue or tax anticipation notes, or other debt service costs.”

State Rep. Michael Zalewski, D-Riverside, who chairs the House Revenue Committee, said in an interview Wednesday that he does not believe the relief funds can be used to repay the Federal Reserve and that any repayment plan will have to be “part of a broader budget conversation.”

But Mendoza said in a statement Wednesday that she believes there may be room to negotiate with Treasury on the use of those funds.

- Posted by Rich Miller        

34 Comments
  1. - Just Me 2 - Thursday, May 13, 21 @ 8:49 am:

    Take a look at how the State was able to get the bill backlog down, and then look at yesterday’s news. Then come back to me.


  2. - Oswego Willy - Thursday, May 13, 21 @ 8:54 am:

    Once again, it’s a racket that one feels the need to “lobby” for ratings when one can look at the constitutional realities of Illinois debt and the record of paying out…

    Refusing to factor in constitutional realities in credit ratings makes any exercise like this a reinforcing of how much a real racket the ratings actually are.


  3. - Pizza Man - Thursday, May 13, 21 @ 8:57 am:

    It ain’t gonna happen. The credit agencies will do it when it’s the proper time.

    A letter from Mendoza ain’t gonna cut it either. “And you are, who?”


  4. - Oswego Willy - Thursday, May 13, 21 @ 8:58 am:

    === The credit agencies will do it when it’s the proper time.===

    What is “proper time”

    Will they factor in the constitutional mandates?


  5. - TheInvisibleMan - Thursday, May 13, 21 @ 9:05 am:

    – The credit agencies will do it when it’s the proper time. –

    Those agencies have explicitly predicated their current ratings on the backlog. It is specified in their ratings statements.

    If the backlog has changed, then by the definition provided by the agencies themselves, the rating should change as well.

    Of course, if the agencies don’t change it would call into question their entire ratings criteria across the board.

    Mendoza knows exactly what she is asking for here.


  6. - Flyin' Elvis'-Utah Chapter - Thursday, May 13, 21 @ 9:07 am:

    “will do it at the proper time”

    Which is to say, not when Illinois bonds go for sale.

    Then, they’ll force that B- rating garbage that will force higher interest rates, even though Illinois bonds are gold and sell at record pace.

    It’s a con that would make the mafia blush.


  7. - Sonny - Thursday, May 13, 21 @ 9:18 am:

    The credit rating agencies know who the state comptrollers are, pizza genius.


  8. - The Dude Abides - Thursday, May 13, 21 @ 9:29 am:

    I wouldn’t be surprised if we get a ratings bump this year. We have a long ways to go but we’re in a much better place than we were during the walking mistake known as the Rauner Administration.


  9. - 1st Ward - Thursday, May 13, 21 @ 9:41 am:

    From Rich’s weekly piece April 23rd: COGFA forecast: A $5 billion deficit and a $19.1 billion backlog by FY2024 assuming a 2.7% annual spending growth; and a whopping $5.7 billion deficit and a $20.5 billion bill backlog assuming a 3.2% spending growth.

    But Mendoza thinks we deserve an upgrade as we pay our bills on time for a couple months but ignores the forecasts her own department puts out that the ratings agencies and the public have access too. Ok. Smells like someone might want a new job and is publicly lobbying for more wins to campaign on.


  10. - Oswego Willy - Thursday, May 13, 21 @ 9:44 am:

    ===But Mendoza thinks we deserve an upgrade===

    This is a bad interpretation, as you are neglecting the truth in the constitution and its role in debt.


  11. - City Zen - Thursday, May 13, 21 @ 10:28 am:

    Mendoza has a point. IIRC, Moody’s and S&P downgraded us in 2017 prior to the income tax hike. Are we better off now than we were at that time? Pension debt increased, but no major spikes. Getting us back to 2016 ratings certainly doesn’t seem like a stretch.


  12. - Donnie Elgin - Thursday, May 13, 21 @ 10:40 am:

    =This is a bad interpretation, as you are neglecting the truth in the constitution and its role in debt=

    What 1st ward said and below to reiterate that the rating is used by investors to gauge risk - compared to similar issuers. No fun being BBB- but someone has to be the lowest. Perhaps we can overtake New Jersey at BBB+.

    “For example, a corporate bond that is rated ‘AA’ is viewed by the rating agency as having
    a higher credit quality than a corporate bond with a ‘BBB’ rating. But the ‘AA’ rating isn’t a
    guarantee that it will not default, only that, in the agency’s opinion, it is less likely to default than the ‘BBB’ bond.”


  13. - the Edge - Thursday, May 13, 21 @ 10:43 am:

    Illinois should get a rating bump automatically because of “no more Madigan”.


  14. - Oswego Willy - Thursday, May 13, 21 @ 10:44 am:

    === What 1st ward said and below to reiterate that the rating is used by investors to gauge risk - compared to similar issuers.===

    By wholly ignoring the constitutional aspect, your own interpretation sounds ridiculous to the honesty, with respect.

    It’s a racket.

    Until the realities of budgetary and constitutional requirements are baked in… it’s truly arbitrary to things not truthful to the process or what it means for Illinois to take on debt.

    Sincerely, with respect.


  15. - Candy Dogood - Thursday, May 13, 21 @ 10:55 am:

    A key demonstration of the credit ratings not reflecting how investors feel about buying Illinois GO bonds is that those bond offers tend to be over subscribed because we’re paying more interest on our debt than we need to.

    Part of the problem with the bond rating agencies is if they actually rated with regards to the actual risk posed by municipal bonds and State GO bonds especially it would make it pretty clear that the whole exercise is a shame because public debt defaults at substantially lower rates than private debt, even private debt with the best credit rating.

    I guess good on Mendoza for asking, but we should probably be demanding that congress or the MSRB actually impose some kind of standard that accurately reflects risk and not the political views of the authors, their bosses, or the people that own their bosses. (Looking at you, Kenny G.)


  16. - John Deere Green - Thursday, May 13, 21 @ 11:17 am:

    ==1st Ward==

    Which forecasts would those be? The Comptroller’s Office doesn’t “put out” forecasts. COGFA and GOMB do that. By the way, speaking of “forecasts,” you know a forecast is a prediction, not a guarantee, right? Did you miss Rich’s earlier post this morning where COGFA revised its revenue “prediction” for FY 2022? Things change.


  17. - John Deere Green - Thursday, May 13, 21 @ 11:22 am:

    Sorry, COGFA revised its FY 2021 revenue projection. The point remains.


  18. - 1st Ward - Thursday, May 13, 21 @ 11:37 am:

    “Sorry, COGFA revised its FY 2021 revenue projection. The point remains”

    Why does it remain? This fiscal year ends next month…. Rich’s column citing COGFA discussed 2023, 2024, and 2025 backlogs of $5Bn - $10Bn plus structural deficits up to $5Bn. Let me know when COGFA or GOMB revises upward by billions on a recurring basis not millions. It’s interesting seeing some commenters who champion an upgrade at the same time as saying the State needed the Fair Tax to pass because it needs more money. Pick a lane.


  19. - Oswego Willy - Thursday, May 13, 21 @ 11:41 am:

    === It’s interesting seeing some commenters who champion an upgrade at the same time as saying the State needed the Fair Tax to pass because it needs more money. Pick a lane.===

    LOL

    The fair tax failure… the payment and constitutional obligation to debt is *exactly* the same. Same if the fair tax passed.

    If your buying into the ratings as a true measure without looking at the role of the constitution, you’re actually the type of person the ratings want… ignoring realities of states’ obligations.

    It’s not even the same type of fruit, It’d be like “apples” and “pork chops”


  20. - 1st Ward - Thursday, May 13, 21 @ 11:44 am:

    “tend to be over subscribed because we’re paying more interest on our debt than we need to.”

    Maybe Mendoza should request lower interest rates if bond issuance is overscribed? That’s how supply/demand works. Also, please review Illinois interest rates each decade for the past 50 years. They are lower today then 10 years ago, 20 years ago, and so on. Soooo….


  21. - JS Mill - Thursday, May 13, 21 @ 11:44 am:

    @Donnie E and 1st- name the last time that the State of Illinois defaulted or was even late with a bond payment. Now tell me all of the other nonsense about debt and how that is even remotely a factor. The pension debt has not changed in 50 years relative to obligations or revenues.

    50 years. And pensioners get their checks like clockwork. Same as the bond holders.

    The ratings game is a racket and nothing more.


  22. - 1st Ward - Thursday, May 13, 21 @ 11:49 am:

    “you’re actually the type of person the ratings want”

    They legally can’t sell issuance to me if they wanted soooo there’s facts instead of dorm room theories. When your issue is with the ratings agency but you come after me. Ok.


  23. - JS Mill - Thursday, May 13, 21 @ 12:08 pm:

    =They are lower today then 10 years ago, 20 years ago, and so on. Soooo….=

    Have you noticed that interest rates have been down dramatically across the board? Yet Illinois is forced to pay higher interest rates, RELATIVE TO THE MARKET, than other states or entities that have less secure payment reliability. There isn’t a corporation in existence that can assure bond repayment with anywhere near the the States ability to pay.


  24. - Steve Polite - Thursday, May 13, 21 @ 1:48 pm:

    =But the ‘AA’ rating isn’t a
    guarantee that it will not default, only that, in the agency’s opinion, it is less likely to default than the ‘BBB’ bond.”=

    If likelihood of default is truly the main driver of ratings, then IL should be AA given the constitutional protection bond holders have.

    Article 8 Finance
    Section 1. General Provisions
    (b) The State, units of local government and school districts shall incur
    obligations for payment or make payments from public funds only as
    authorized by law or ordinance.

    The Illinois Supreme Court has upheld a statute providing for issuance of some bonds,
    which stated that if the General Assembly did not appropriate enough money to pay the bondholders, that statute would act as an irrevocable, continuing appropriation of money for that purpose. - People ex rel. Ogilvie v. Lewis, 49 Ill. 2d 476, 274 N.E.2d 87 (1971).

    Excerpted from: 1970 Illinois Constitution Annotated for Legislators
    5th Edition December 2018
    Publication 427


  25. - Oswego Willy - Thursday, May 13, 21 @ 2:23 pm:

    === If likelihood of default is truly the main driver of ratings, then IL should be AA given the constitutional protection bond holders have.====

    Then that would collapse the racket.

    Until ratings factor in constitutional realities, it’s merely a racket.


  26. - City Zen - Thursday, May 13, 21 @ 3:20 pm:

    ==If likelihood of default is truly the main driver of ratings==

    It’s not. There’s pace of spending growth, long term liability burden, debt and pension considerations, etc. Maybe the Comptroller’s Office can petition the ratings agencies to base their ratings 100% on what happened in the past and state constitutional provisions. Then the market can decide if that is sufficient.

    https://www.fitchratings.com/research/us-public-finance/us-public-finance-tax-supported-rating-criteria-27-03-2020


  27. - Oswego Willy - Thursday, May 13, 21 @ 3:23 pm:

    === It’s not.===

    And neither is the constitutional aspect you like to constantly ignore as you point “look over here” but seemingly fail to recognize the realities of that pesky constitution and paying but… “ratings are more”

    You go with that. It’s a racket.


  28. - Steve Polite - Thursday, May 13, 21 @ 4:25 pm:

    City Zen,

    I beg to differ.

    According to Investopedia.com “How are Bonds Rated”:
    “A bond rating is a grade given to a bond by a rating service that indicates its credit quality. The rating takes into consideration a bond issuer’s financial strength or its ability to pay a bond’s principal and interest in a timely fashion.”

    While financial strength is a consideration, for IL the ability to pay is guaranteed in the constitution. There is zero risk of default. This fact should be the overarching consideration. OW is right. Not considering IL’s constitutional requirement to pay bond debt and rating IL a higher risk, makes the ratings game a racket.


  29. - City Zen - Thursday, May 13, 21 @ 4:43 pm:

    ==you like to constantly ignore==

    I didn’t write the ratings agencies’ rules. It’s their formula, not mine.

    If the state feels constitutional guarantees should comprise 100% of any agency rating, then the state should demand the agencies change their formula. Until then, all those factors you feel are less important are otherwise integral to their equations.


  30. - Steve Polite - Thursday, May 13, 21 @ 4:47 pm:

    City Zen,

    Thank you for the link. It looks like Fitch is ignoring one of its own criteria for analysis when it comes to Illinois and its constitution.

    “The main purpose of state scenario analysis is to provide a relative sense of the risk exposure of a particular issuer compared to other states.”


  31. - Oswego Willy - Thursday, May 13, 21 @ 4:51 pm:

    === I didn’t write the ratings agencies’ rules. It’s their formula, not mine.===

    Which is why when they too ignore the constitution it’s a scam


  32. - 1st Ward - Thursday, May 13, 21 @ 5:52 pm:

    “Which is why when they too ignore the constitution it’s a scam”

    Paying vendors on time isn’t in the constitution so Moody’s/S&P should ignore and rate Illinois the same as other States who pay all of their obligations. Again, they are rated investment grade just a lower investment grade rating then others who pay their vendors on time and don’t have a history of taking “pension holidays”. But yes it’s a SCAM. Argentina’s constitution says it must settle the payment of foreign and domestic debt of the Nation yet it’s defaulted plenty of times. Should S&P/Moody’s say well look at the constitution it’s a AAA until it defaults?


  33. - Oswego Willy - Thursday, May 13, 21 @ 6:00 pm:

    === Again, they are rated investment grade just a lower investment grade rating then others who pay their vendors on time and don’t have a history of taking “pension holidays”===

    So.. you’re ignoring the constitutional constraints too.

    That’s fun.

    It’s a scam if they refuse to *acknowledge* bonds, which is what the ratings are for… are paid in conjunction with…

    === Article 8 Finance
    Section 1. General Provisions
    (b) The State, units of local government and school districts shall incur
    obligations for payment or make payments from public funds only as
    authorized by law or ordinance.

    The Illinois Supreme Court has upheld a statute providing for issuance of some bonds,
    which stated that if the General Assembly did not appropriate enough money to pay the bondholders, that statute would act as an irrevocable, continuing appropriation of money for that purpose. - People ex rel. Ogilvie v. Lewis, 49 Ill. 2d 476, 274 N.E.2d 87 (1971).===

    … which is why selling bonds magically isn’t too tough.


  34. - Oswego Willy - Thursday, May 13, 21 @ 6:02 pm:

    === Argentina’s===

    If you need to go all “Argentina”, “Greece” …

    You’re not an adult in this conversation.

    Illinois hasn’t defaulted and retirees have not missed payments.

    But please… “Argentina”, lol


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