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* Illinois paid a pretty high price for its tobacco bond sale yesterday…
Illinois drew robust investor interest for a $1.51 billion tobacco bond, but at a price: it offered a yield above 6% for its longest maturing debt, more than a full percentage point over other recent muni offerings.
The state agency selling the bond increased the size by about $50 million and shaved the yield 0.15 percentage point from its original starting point Tuesday, as the deal’s hefty return and conservative structure offset worries about Illinois’ finances and falling cigarette sales. Citigroup was the senior manager on the sale; Barclays Capital was the co-manager.
Most of that $1.3 billion the state will get up front will be used to pay off overdue state bills, which means we’re exchanging soft debt for hard, Wall Street debt. That’s risky business, but the state is so freaking broke it basically has no choice. We’re borrowing long-term for current operations. Scary stuff.
Some of the money, $47 million, will go to continue subsidizing the 26,000 jobs created by the formerly federally financed Put Illinois to Work Program. The federal subsidy expired during the campaign and the governor unilaterally extended the program with state money, but didn’t have a specific revenue source. So, now the state will be spending borrowed money to pay for this program.
The governor really needs to find a “real” revenue stream if he wants to keep this program alive. Ralph Martire makes a good point…
But not everyone thinks the sale of the bonds was a wise decision. Ralph Martire is executive director at the Center for Tax and Budget Accountability.
He said if the state is going to sell the bond, they should use the money to pay down the deficit.
“I think a pretty solid argument could be made that every penny of that $1.2 billion ought to be used to expend towards reducing the state’s current deficit,” he said.
“And frankly to spend that over $6 billion in past due bills we owe to providers that have to make their payroll and/or fire people and they’ve already delivered services. So there’s jobs on the line there, too.”
It shouldn’t have to be “either, or,” but there ought to be revenues out of existing funds to pay for this program.
* The price the state paid for the bonds wasn’t all the state’s fault, however…
Tobacco bonds are under particular scrutiny because Standard & Poor’s downgraded about $22 billion of them to junk status this month, citing a decline in cigarette sales, among other reasons. In August, a prominent analyst, Dick Larkin of Herbert J. Sims & Co., warned of possible tobacco-bond defaults by 2030, saying that assumptions about future tobacco sales were overly optimistic.
The state agency selling the bonds—Railsplitter Tobacco Settlement Authority—addressed such concerns with conservative revenue assumptions. Bondholders will still get paid even if cigarette consumption falls as much as 10% each year, compared with an average annual decline closer to 3% in the past decade, Mr. Sinsheimer said.
And here is what this cash means for the state…
The state is pledging roughly twice the amount of cash flow needed to pay off the bonds over the next 17 years, which means cigarette consumption can decline 10% a year before cash flow gets close to the amount needed for debt service. While smoking declined 9.3% last year, the average decline has been 4% a year since 1998, according to Mr. Larkin.
If smoking declines by 4% a year over the next 17 years, the state will receive a total of about $4.9 billion in tobacco settlement payments and need about $2.2 billion for debt service, according to the prospectus for the bonds. The state will keep whatever amount is left each year after making payments on the bonds. […]
Essentially, the deal gives the state about $1.3 billion upfront after expenses and reserves, while shifting the risk that smoking will decline from the state to bondholders, with a very healthy cushion to minimize that risk.
“If smoking declines greater than 10%, then Illinois made a very smart move,” Mr. Larkin said. “It’s possible, but unlikely. I’m a smoker myself and I know how hard it is to quit.”
*** UPDATE 1 *** From Senate GOP Leader Christine Radogno…
– Senate Republican Leader Christine Radogno (R-Lemont) is asking Gov. Pat Quinn to provide lawmakers with more information on the recent extension of his taxpayer-subsidized “Put Illinois to Work” program. Radogno is questioning the $47 million extension at a time when Illinois owes approximately $9 billion in overdue bills and faces a massive deficit, some estimate at roughly $15 billion.
“I don’t doubt the program’s intentions, but when the state is facing a $15 billion deficit and owes billions more in bonding and pension debt, we have an obligation to ask, ‘Is this program the most effective way to create the good-paying, permanent jobs that Illinois needs,” Radogno said.
“Not only is it a waste of taxpayer dollars to expand the program piece-by-piece without any plan or requirement that participants will ultimately see permanent employment, it’s cruel to the men and women who believe they’re working towards a long-term position.”
Radogno found it particularly troublesome that Quinn intends to use funds drawn from a recent tobacco settlement to cover the cost of the expansion. She noted that the Governor’s plan to use the recent bond sale proceeds to extend the program maybe be a violation of both the letter and intent of the law enacted authorizing the securitization of tobacco settlement funds to reduce the state’s bill backlog. Radogno also noted that the six-week extension will cost taxpayers for the next 18 years, at a ratio of more than 145 days of debt for every one day of the program.
In a letter sent to Thursday to Gov. Quinn, Radogno asked for information on the following:
• Of the 26,000 program participants, how many have transitioned to permanent, non-taxpayer-subsidized jobs with their “Put Illinois to Work” employers;
• How many participating employers have committed to offer permanent employment to these workers when the program concludes;
• What, if any, system of means testing has been implement to assure participating employers do not have the ability to pay employees’ wages, and are not using the program to increase profits, inflate stock values, reduce costs or delay hiring permanent workers; and
• What legal authority does the Governor have to use these bond proceeds to expand a new program, contrary to the purpose of the borrowing stated in the authorizing legislation.“The answers to these questions are necessary to evaluate the effectiveness of the program, but I also consider Governor Quinn’s response to be an indicator of his ability to address the overarching fiscal challenges facing Illinois,” Radogno said.
*** UPDATE 2 *** Budget director Dave Vaught talks about the tobacco bond sale…
* Related…
* Tax-Exempt Securities Extend Rally as Investors Seek Safety:
posted by Rich Miller
Thursday, Dec 2, 10 @ 9:53 am
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And the legislature passes civil unions and debates the death penalty, not that these aren’t important issues, but the only issue the legislature should address until it is resolved is the budget.
Comment by Jim Thursday, Dec 2, 10 @ 10:05 am
===but the only issue the legislature should address until it is resolved is the budget. ===
I disagree. There are other issues that need to be addressed in this state.
However, I do agree it’s ridiculous that nothing was even started during the veto session about that budget topic.
Comment by Rich Miller Thursday, Dec 2, 10 @ 10:07 am
Rich,
You and I both know why nothing was started. No one has answers they are willing to state publicly. Everyone knows the public doesn’t want a tax increase. No one wants to go on record for specific cuts needed to bring things in line.
So we fall back on borrowing and gambling, two doors that will close on us very soon. And then the fun will go away.
Comment by John Bambenek Thursday, Dec 2, 10 @ 10:22 am
Rich,
While I generally agree with your statement about any legislature being able to address multiple issues, I don’t think you are correct at this time. Quinn and the GA exhibit no discipline, and has a political perception problem to boot. I got in an argument a few days ago in another thread about the need for Quinn and the GA to focus on the budget/taxes/spending issue (getting the normal, expected snarky comments in reply).
Can not the leaders of this state realize that people are concerned about the economy to the point of exclusion of almost everything else, and that and superfluous issues feed citizens’ concerns about the future? Any of these side issues (civil unions) dilute the efforts of the GA. People will say that the GA should be able to do both. Well, that may be true, but the GA can’t send two messages at once without stepping on one or the other. For appearances only, would it not be more effective (and give the state government more credibility and political capital later) if they were seen in meetings, in session, and in public working on our budget issues full time? Instead, the message is that we care about a whole rift of other things other than you, the voters, concerns.
Heck, they may even be able to come up with a scheme to address this budget mess.
Comment by Cincinnatus Thursday, Dec 2, 10 @ 10:31 am
More borrowing is of course not the long term answer, but non profit human service providers desperately need their back payments in order to keep functioning. Another band aid is not ideal, but we are not in ideal times.
Comment by gathersno Thursday, Dec 2, 10 @ 10:33 am
==and has a political perception problem to boot===
The election is over, man.
Comment by Rich Miller Thursday, Dec 2, 10 @ 10:49 am
Captfax were dozing
Budget was addressed in house when ‘boards Cross failed to cert the pewnsion payment and hiked the deficit by $4 billion
Ralph fails to get 6% debt v. 12% debtg
Oh well
Comment by circularfiringsquad Thursday, Dec 2, 10 @ 10:51 am
“The election is over, man”. That’s obviously true, but that’s all a lot of these politicians know how to do - campaign. Their track record on governing in this state is beyond poor. Heck, we still don’t officially have a budget for this year.
Comment by Holdingontomywallet Thursday, Dec 2, 10 @ 11:13 am
Holdingontomywallet, you took my comment out of context. Try not to do that with the blog owner, please.
Comment by Rich Miller Thursday, Dec 2, 10 @ 11:16 am
After reviewing the comment and your response, I see I was a little “quick on the trigger”. Sorry about that Mr. Blog Owner!
Comment by Holdingontomywallet Thursday, Dec 2, 10 @ 11:36 am
lol
Thanks.
Comment by Rich Miller Thursday, Dec 2, 10 @ 11:37 am
Actually, the state got a pretty decent price considering the current muni market (volatility in Europe) and general market wariness for tobacco settlement bonds.
Put it this way; we’ve got the money now to pay people we owe money. Now it’s the bondholders problem if people quit smoking. I’d watch out for the inevitable “bankruptcies” in future years as Big Tobacco looks for a way to wriggle out of the settlement.
Comment by wordslinger Thursday, Dec 2, 10 @ 11:39 am
Good questions from Radogno, although perhaps too late since the guv has already leased the tobacco cow, for the next couple of decades anyway and I guess he gets to say what happens to the $$$.
I’d like to know if the 26,000 beneficiaries of the work program are the same, or nearly all the same, or are they cycling through and on to better permanent jobs. If these are low-wage unskilled jobs will they even exist when the economy improves or will they go the way of so many low-wage jobs-out of the country or lost to technological improvements. The undereducated are having a much worse recession than the college degree and more crowd, even if you are hearing stories about somebody’s nephew who just graduated college and can’t find a job. Will this undereducated group ever recover economically or are we committed to permanently sustaining a low-skilled underclass in make-work jobs. Can we afford it. This is not just an Illinois question of course.
Comment by cassandra Thursday, Dec 2, 10 @ 11:39 am
Ok Rich, I agree, it isn’t the only issue but it is the biggest problem, the state could fund entire programs with money being spent on interest payments.
Comment by Jim Thursday, Dec 2, 10 @ 11:49 am
Always nice to see when reasonable people can disagree, without becoming excessively disagreaable in the process.
That being said, Senator Radogno appears to be a voice of reason on this issue. I hope that the Governor’s office response will get equal time here; if and when they ever get around to replying.
I recognize the value and benefit of programs that are designed to help people get back to work. I am also concerned about the jobs of those that are working still, but may not be able to do so for much longer due to the state’s inability to pay its bills.
The decision to fund the jobs program; even if it is modestly effective, could still result in net negative employment if the state does not start paying the people it owes, for services already rendered long ago.
Comment by Quinn T. Sential Thursday, Dec 2, 10 @ 11:59 am
Yes, trading soft deft for hard debt IS scary stuff. We’re paying credit cards off with other credit cards…and apparently at a worse interest rate. That is why all the talk of puppies, and every other red herring, frustrated me to no end during the election. That election may be over, but the repercussions live on. I’m still waiting for fundamental, structural changes to our budget and our spending. Related: Ralph Matire made an excellent point.
Comment by Liandro Thursday, Dec 2, 10 @ 12:01 pm
Has there been any economic analysis regarding the 26.000 subsidized jobs in the Put Illinois to Work Program?
By that I mean if the subsidy goes away, do the jobs go away? If so, what would be the hit to the state in terms of new unemployment benefits that will have to be paid as well as lost income and sales tax?
If, and that’s a big if, for instance, all 26.000 jobs go away and all 26,000 are qualified to receive on average $200/week, that works out to $5.2 Million/ week. You see where I’m going with this. It may make sense to the state’s budget. Then again, it may not. But without having a handle on these numbers it’s hard to make a judgement, leaving aside the human costs.
I’m just trying to put this into some reasonable perspective.
Comment by MikeMacD Thursday, Dec 2, 10 @ 12:05 pm
MikeMacD, because of the nature of this program, participants don’t qualify for unemployment insurance. That’s one reason the guv wants to keep the program going, because if they’re laid off, they end up with nothing.
Comment by Rich Miller Thursday, Dec 2, 10 @ 12:07 pm
Rich,
Thanks, I didn’t know that.
Comment by MikeMacD Thursday, Dec 2, 10 @ 12:19 pm
Now that Illinois has securitized future revenues from the tobacco settlement and has or soon will collect its present value, will this open the flood gates for tobacco taxes? Before, the government probably felt some restraint because excess tobacco taxation jeopordized the tobacco settlement cash flow, as more folks quit to avoid the expense. But now that bond holders have decided to gobble up that risk, what do state and local gov bodies have to lose?
Comment by Cook County Commoner Thursday, Dec 2, 10 @ 12:41 pm
Rich,
Politics are not elections.
Comment by Cincinnatus Thursday, Dec 2, 10 @ 1:43 pm
Cincinnatus, perceptions are less important now than during the campaign. Plus, I don’t like to dwell too much on perceptions because perceptions are so often wrong. Let’s deal with reality. This “perception is reality” stuff is not healthy.
Comment by Rich Miller Thursday, Dec 2, 10 @ 1:46 pm
ummm…Cook County Commoner - have you seen the tax rate on tobacco lately? A pack of cigarettes is nearly $10 in Chicago.
Heck, the last time I looked downstate, I believe the price of a pack was over $5.
Usually I don’t like the idea of selling future revenue streams for a big up front payment, but smoking rates are going to continue to fall with people dying, other people quitting due to the price of cigs being so high, and fewer and fewer young people taking up the habit in the first place. Seems to me that this will probably be a good deal when all’s said and done.
And picking nits over $47 million out of the $1.5 billion sale? Seems like Ms. Radogno just doesn’t like poor people having some kind of income in these troubled times.
Comment by jerry 101 Thursday, Dec 2, 10 @ 1:55 pm
I am not a Republican, but I agree with Senator Radogno. The Railsplitter Tobacco Settlement Authority Act was presented to the General Assembly as part of the Emergency Budget Act of Fiscal Year 2011. At the time it passed many members only voted for it because the language of the bill appeared to require that the funds be used to pay off back debt. Even Ralph Martire appears to agree with Senator Radogno on this issue.
Governor Quinn by shifting $47 million to the Put Illinois to Work Program is fueling the Republican opposition to tax increases of any type. While I suspect that the Governor’s intentions are to protect the 26,000 program participants and his motives are good, the cost of his actions may be additional layoffs of state workers, teachers, etc due to drastic budget cuts if there are zero increases in taxes. The economic costs to Illinois could be far greater than $26,000 low paying Put Illinois to Work jobs.
Comment by Rod Thursday, Dec 2, 10 @ 2:18 pm
{And picking nits over $47 million out of the $1.5 billion sale? Seems like Ms. Radogno just doesn’t like poor people having some kind of income in these troubled times.}
A million here; and a million there, and pretty soon you are talking about real money; OUR MONEY.
We have to pick up the cost of this debt, and if the capital is being imprudently deployed then we need to know about it, and speak out against it.
I still question whether or not the potential inadvisable use of the $47 million could end up causing net negative employment, as state vendors and contractors lay people off and close up shop due to non-payment by the state for their services.
I look forward to the Governor’s office response on this. Somehow I suspect that political expediency will keep that response percolating on the back burner for some time to come.
Comment by Quinn T. Sential Thursday, Dec 2, 10 @ 2:30 pm
There is an immutable economic truth, if you want more of something, lower its price, if you want less of something, raise its price.
Either for social engineering purposes, or revenue reasons, the cost of a pack of smokes is high, and rising. To base a bond issue on this means that there will have to be a known stream of revenue to pay the bond, which means that there either need to be more smokers, or as the number of smokers (because it is in their best self-interest to do so), the taxes must increase in some proportion as the smokers decrease.
Eventually, there will be a point in time where a precipitous decrease occurs, and revenues will be totally unpredictable. To base the long-term repayment of bonds on such a system is imprudent at best, and ludicrous at worse.
Now, let’s look at the use of the money. The bucks aren’t going toward infrastructure where support of wealth-increeasing businesses give a positive return on the investment though increased tax revenues. The money goes to a temporary program that has lost its Federal funding (and probably ain’t coming back).
So we have taken on long term debt, with a risky repayment plan for a very temporary benefit.
I believe this nicely captures the mindset of Gov. Quinn.
Good luck, Pat.
Comment by Cincinnatus Thursday, Dec 2, 10 @ 2:52 pm
–To base the long-term repayment of bonds on such a system is imprudent at best, and ludicrous at worse.–
The market obviously disagreed, as the issue sold out in a New York minute. Anyway, it’s the bondholders taking the risk now. It’s their problem if tobacco sales don’t cover the nut. The state got the money upfront.
Comment by wordslinger Thursday, Dec 2, 10 @ 2:58 pm
wordslinger, the market did what was good for them, not for us. We’ve exchanged soft, short-term debt for hard, long-term debt. Not a good thing.
Comment by Rich Miller Thursday, Dec 2, 10 @ 3:03 pm
Candidate for Quote of the week, Dave Vaught
“The market sees that We’re still a strong state out there. We’ve got a few problems that we’ll be able to solve”
A few problems? Do you think?
Just ballpark for me director, when do you think you’ll be able to solve these “few problems?”
Also, later in the comments he totally blew this whole “strong state theory” out of the water by patting himself on the back and stating that the reason for the higher rating was the structure of the bond. The market is starving for bonds right now because the Fed is holding interest rates so low, and if Illinois put out a good bond backed by a solid revenue stream it doesn’t surprise me at all that it was rated high and sold out fast.
Hey Director, since its Christmas time, pull my other leg and see if it plays Jingle Bells.
Comment by Jaded Thursday, Dec 2, 10 @ 3:31 pm
Rich, normally I’d agree with you on this issue, but these aren’t normal times.
I like the deal for a couple of reasons:
– we owe these folks money. We have, in fact, been borrowing from them. Let’s do the right thing and help ease some of the pressure we’ve put on them. That pumps money into our economy right now and keeps people in jobs, earning, spending and paying taxes.
– The bonds are backed, and only backed, by a very dodgy revenue source that is clearly in decline. There’s no state GO or other state revenue source backing the bonds. Tobacco shipments were down nearly nine percent last year. Is there any reason to believe that won’t continue over the 17-year bond maturity? With continued declines, who’s to say that Big Tobacco won’t roll into Bankruptcy Court and try to shed obligations?
We got much needed money to people we owe right now and the bondholders assume the risk for the revenue source.
Hats off to Quinn and crew for getting it done.
Comment by wordslinger Thursday, Dec 2, 10 @ 3:36 pm
wordslinger, an even bigger problem I have here - and it’s a huge one - is that if there is no corresponding cut and/or new revenue stream then we’re gonna be back to the same position in a few months, or even less.
The bills will continue to pile up until the structural deficit is addressed. All we’ve done here is pay off a big credit card debt with a second mortgage without corresponding spending reductions or income increases. It’s absolutely insane.
Comment by Rich Miller Thursday, Dec 2, 10 @ 3:41 pm
Rich, it’s not perfect, but no choices right now are good. There’s still time to cut.
But I think I’ve identified a revenue source: Income tax on Adam Dunn’s 4-year, $56 million contract with the White Sox, just out on the radio.
Comment by wordslinger Thursday, Dec 2, 10 @ 3:51 pm
Here are a few of my ideas:
1- a sales tax on candy, beer, non essentials and luxury items
2- Let business owners decide smoking rules for their establishments
3- Cut committee salaries and expenses
4- Re-evaluate top admin salaries. The last budget most directors received $2000. The employees…zip!
5- Uniform state agencies. DHS has directors, dep. directors, etc. Most top admin are SPSAs. Not needed when many PSA or lower would be willing to do the job for less than 90g’s.
6- Move the OIEG under the auditor general and save a few million.
7- Stop raising taxes on Cigs, etc. We that do smoke are not willing to pay $100 a carton! That revenue is drying up.
8- Do away with EE time and the bogus Furlough vacation, etc. days. It cost us more (forms, time, etc.) and save nothing!
It may not be much, but it is a start. That is more than I can say for our governing body! That is how I save, a penny at a time. It can work if they apply themselves and stop needless spending until we have a grip on the budget. In the recession, municipalities and states were not building parks, sidewalks, giving $$ to churches…they stopped spending. I am not like most on here or as educated, but common sense has to be utilized FIRST.
Comment by Ain't No Justice Thursday, Dec 2, 10 @ 5:26 pm