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* UPDATED x1 - S&P removes IL from watch list * Moody’s reaffirms negative outlook, reports SEC probe - TRS fights back - Christie gins it up

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Illinois

*** UPDATE *** Another spot of slightly good news. Illinois is off S&P’s watch list…

Standard & Poor ’s Ratings Services on Tuesday removed Illinois from a watch list for a potential downgrade, citing the state’s action this month to raise taxes and cap spending.

“The CreditWatch removal reflects our view of the state’s recently enacted legislation that provides for structural budget solutions, which we believe will likely allow the state to begin to address its sizable accumulated budget deficit and could provide a foundation for structural budget balance in the future as well as improved liquidity,” said S&P credit analyst Robin Prunty in a statement.

But…

S&P said Illinois is not out of the woods yet, however, as it affirmed an A-plus rating for the state’s general obligation bonds, while assigning a negative outlook to the rating

[ *** End Of Update *** ]

* Illinois continues to receive a “negative” outlook from Moody’s Investor Services, mainly because the state has not yet passed legislation to deal with its overdue debt…

The outlook for the State of Illinois is negative, primarily reflecting uncertainty surrounding plans to address the state’s large balance of accounts payable.

But it did offer some significant rays of sunshine…

Notwithstanding these sunset dates, the tax rate increases are an important first step in restoring fiscal stability, creating a window of several fiscal years in which the state can address structural challenges, such as rising pension expense. The next milestones will include the Governor’s budget proposal, expected February 16, and resolution of proposed measures to address an approximately $8 billion backlog of payables in coming months. […]

The [expenditure limitations] law, scheduled to remain in effect through fiscal 2015, therefore provides strong incentive for compliance. […]

In connection with fiscal legislation enacted in May 2010, the state has published its first multi-year financial plan, including revenues and expenditure projections through fiscal 2014. This represents implementation of a governance practice that, over time, may help produce strong operating results.

Statutory dedication of half a percentage point of the recent individual income tax increase [to pay of the bond for overdue bills] would mitigate impact on the state’s financial operations, however

* However, the Moody’s report also disclosed that the SEC is looking into how the state disclosed savings from last year’s pension system reforms…

The Securities and Exchange Commission in September began a non-public inquiry into the state’s disclosure of potential savings from these [pension system] reforms. The state is cooperating. The inquiry itself does not indicate that a violation of federal securities law has occurred, according to current state disclosure statements.

The state says the probe doesn’t indicate that laws were violated, but that’s pretty much ignored in the coverage…

The Securities and Exchange Commission has launched an inquiry into public statements by Illinois officials about the state’s underfunded pension fund, the state’s governor’s office confirmed Monday night.

The Illinois inquiry is focused on public statements concerning an overhaul measure passed in 2010 meant to help shore up the retirement system, said the governor’s spokeswoman, Kelly Kraft.

“We are fully cooperating” with the inquiry, said Ms. Kraft in an interview. “We feel our disclosure was always accurate and complete.” […]

An issue being examined is whether Illinois was taking future savings and treating them as current reductions in the cost of the pension fund, said Robert Kurtter, a managing director in the public finance division at Moody’s Investors Service, who said his firm spoke with Illinois officials about the inquiry. One of the measures that Illinois took to save costs was to raise the retirement age for newly hired Illinois workers. Mr. Kurtter mentioned the inquiry in a report released Monday evening.

Gov. Pat Quinn specifically said last year that the state would not draw down on the program’s long-term savings for immediate use. This is definitely an interesting turn of events.

* Meanwhile, the Teachers Retirement System has taken aim at Jonathon Rauh, an associate professor of finance at Northwestern University, who predicted with much fanfare that TRS would run out of money by 2018. From the pension system…

Rauh makes his predictions based on a set of facts of his choosing, and financial experts point out that he chooses a set of facts to ensure that he comes up with the conclusion he wants.

* For instance, he greatly underestimates the investment income pension systems will create in the future. He uses an unrealistic rate of return of about 2 percent on investments, which deliberately shorts all future income for TRS.
* The agency’s target rate of return is 8.5 percent. In the last year, the agency’s actual rate of return was 12.9 percent. Over the last 25 years it is 8.6 percent and over 28 years it is 9.4 percent. […]

Rauh’s prediction will only come true if TRS does not earn another dime in investment income or receive any state contribution over the next eight years. That scenario is not only unlikely, it is impossible. His prediction is wrong.

* New Jersey was investigated by the SEC last year for failing to properly disclose the true health of two pension systems. It settled the case without admitting wrongdoing. But this SEC probe of both states probably won’t be mentioned in the coverage of Gov. Chris Christie’s latest push…

The governor is launching an ad campaign encouraging businesses in Illinois to relocate to the Garden State. An official announcement from the Christie administration is planned for Tuesday, when ads will start appearing in newspapers and on radio stations in major Illinois cities like Chicago and Springfield.

Print and radio ads reiterate Christie’s commitment not to raise taxes. The ads follow substantial tax increases recently enacted in Illinois — and a promise from Christie earlier this month that he would reach out to Illinois businesses personally and invite them to relocate here. […]

[The tax hike] makes Illinois’ business tax rate higher than New Jersey’s 9 percent for businesses with incomes over $100,000. But its personal income tax rate remains lower: New Jersey’s rate is 6.37 percent for couples earning more than $150,000 a year and 8.7 percent for those earning more than $500,000 a year. […]

The ads follow a personal appeal from Lt. Gov. Kim Guadagno, who sent letters to 553 Illinois-based companies large and small that will be affected by the tax increases.

posted by Rich Miller
Tuesday, Jan 25, 11 @ 9:43 am

Comments

I mean, have you ever *been* to New Jersey? Don’t anticipate a long parade of relocating businesses.

Comment by Ray del Camino Tuesday, Jan 25, 11 @ 9:56 am
The beginnings of a second Civil War?

Comment by Deep South Tuesday, Jan 25, 11 @ 9:57 am
at the very least our national face right now isn’t a tipsy 21 year old who stars on mtv on thursday nights at 8 and is known as a snooki.

Comment by shore Tuesday, Jan 25, 11 @ 9:58 am
Relocate to NJ? So many lovely choices: Camden, Newark, Jersey City, Hoboken. Do all these GOP govs. operate from the same playbook? Not a lot of imagination there.

Moody’s is certainly being cautious in maintaining a negative outlook on a sovereign state issuer that hasn’t missed or been late on a bond payment in nearly 200 years. Makes you wonder what criteria they were using when they assigned AAA ratings to subprime mortgage securities all those years.

Comment by wordslinger Tuesday, Jan 25, 11 @ 9:59 am
So some of the big cuts Quinn says he made are being examined by the SEC?

Comment by Cincinnatus Tuesday, Jan 25, 11 @ 10:02 am
Donut looks like the SEC has found another example of Quinn saying one thing and then doing the opposite. The man has a serious problem with not keeping his word.

Comment by Fed up Tuesday, Jan 25, 11 @ 10:05 am
Political theatre, plain and simple.

Comment by UISer Tuesday, Jan 25, 11 @ 10:09 am
Cincy, seriously? Did you read the stories at all? Do you think the SEC investigates state budgets? Wow.

Comment by wordslinger Tuesday, Jan 25, 11 @ 10:11 am
Gov. Christie is a funny guy. If he can just keep it together long enough for the prez run, he can skip out on his term (ala the Alaska Gov) and leave all the tough decision to someone else, like the Democratic Senate President, who has to fill in and take charge during snow emergencies and when the state’s GOP “leadership” has better things to do elsewhere in the country.

Gov. Snooki has the talking points of a fiscal conservative like Peter Fitzgerald combined with the strawman marketing tact of Rod Blagojevich.

Now that’s a chief executive you can trust to get things done. Or at least talk about getting things done. Or demanding they be done his way or you’re the devil. Or just demanding while, actually, nothing is getting done.

Comment by piling on Tuesday, Jan 25, 11 @ 10:13 am
===Do you think the SEC investigates state budgets? Wow.===

Slinger, you’re out of line. Do you know how hard it is to bloviate and stick to the facts at the same time?

Comment by Obamarama Tuesday, Jan 25, 11 @ 10:14 am
Local governments/states compete for businesses all of the time, but this seems to be an all out war by the Republicans–and a hypocritical one, too, because for New Jersey, the personal/business tax combo is not much different than Illinois.

Illinois needs a strong response to these attacks, like the recent business deal with China. I hope we get a high-speed rail. We also need politicians to take the political fight back to the instigators.

Comment by Grandson of Man Tuesday, Jan 25, 11 @ 10:15 am
“Our national face right now isn’t a tipsy 21 year old… known as Snooki”

True, but at least THEIR reality TV stars aren’t elected officials!

Comment by Secret Square Tuesday, Jan 25, 11 @ 10:16 am
SS:
“True, but at least THEIR reality TV stars aren’t elected offials!”

YET

you know it’s coming. And it should scare everyone. (NJ Congressman The Situation — R-Yikes!)

Comment by piling on Tuesday, Jan 25, 11 @ 10:18 am
@SS

Should be ‘Former’ elected officials!

Comment by How Ironic Tuesday, Jan 25, 11 @ 10:19 am
I should amend my last comment to read “At least THEIR reality TV stars, to date, have never been elected officials or spouses of elected officials.”

Comment by Secret Square Tuesday, Jan 25, 11 @ 10:23 am
wordslinger,

Asked a honest and legitimate question here. Are the items being investigated by the SEC some of the same items Quinn and his supporters use as examples of the big cuts Quinn has made as governor?

I don’t feel too much like digging for a couple of hours to find out for myself. I thought perhaps those that follow these matters more closely than I would be able to provide a “yes” or “no” off the tops of their heads.

So instead of making fun of me, would you care to take a stab at the answer instead?

Comment by Cincinnatus Tuesday, Jan 25, 11 @ 10:26 am
I don’t know, maybe it’s outlets like CapFax that have brought all of this to our attention, but I don’t really remember Governors taking potshots like this at other Governors in the 70s, 80, 90s, or later. Even Rod didn’t get the vitriol from other Govs that PQ is getting.

To me, it smacks of a need to a) elevate themselves to a national stage (RRB disease) and b) distract their home-state voters because they don’t have any real solutions. And both parties are guilty.

That said, considering their own budget crises and skipped pension payments, I wonder how true fiscal conservatives feel about Gov. Christie spending NJ cash in Illinois.

Do you have to pay taxes on advertising? If so he’s helping out Illinois. But even if not, he’s putting money in the pockets of residents here, so I think we should thank the big guy.

Comment by Thoughts... Tuesday, Jan 25, 11 @ 10:30 am
Why move all the way to New Jersey when we have NW Indiana right next door? They smell the same, but Gary is much closer than Newark.

Comment by 47th Ward Tuesday, Jan 25, 11 @ 10:31 am
Cincy, I apologize.

The SEC, with its oversight of securities, has been looking into whether states and municipalities have been cooking the books in valuing their pension assets and liabilities in disclosure documents prior to the issuance of bonds.

Comment by wordslinger Tuesday, Jan 25, 11 @ 10:36 am
Unless I am mistaken, it took a Freedom of Information Act for Professor Rauh to obtain the data needed for his projections. That being said, I wish I had the expertise of the ones running the pension fund. 8.5% per year is pretty darned good. Why no doubt at all every mutual fund has job offers out to the managers and no doubt the ones at social security would like to hire them as well. I can see now Illinois’ troubles are over thanks to the brilliance of the management of the Illinois pension funds

Comment by Laughing_All_The_Way Tuesday, Jan 25, 11 @ 10:36 am
TRS is right about Rauh. His recent analysis was based on when pension systems would run out of money IF they never get another dime from investments or the state budget. Completely unrealistic, but hey, he’s an academic. And while completely unrealistic, it’s also impossible to prove wrong since it’s based on a hypothetical.
And that, ladies and gentlemen, is how you get media attention and ivory tower accolades.

Comment by piling on Tuesday, Jan 25, 11 @ 10:47 am
The latest bond rating by Moody’s is no surprise to anyone. The question, “Should state governments that have allowed themselves to get past the point of no return financially be allowed to declare bankruptcy?” could be the number one story of 2011. There is currently discussion going on among GOP & Democrat fiscal conservative lawmakers in Washington regarding changing federal law to allow certain states (after meeting stringent guidelines) to declare bankruptcy. That is going to be “the story of the year.” Those states (aka. Illinois and California) that the federal government would allow to declare bankruptcy would have to meet stringent requirements and follow tough federal procedural rules in order to be able to clean their financial slates. Illinois and California have realisticly allowed themselves to get past the point of “no return” in regard to being able to do anything except for: 1) Declaring bankruptcy so they can wipe their state’s financial slate clean, or 2) Count on the federal government and Obama to come riding to their rescue with another federally financed rescue package (Q-92) to save Obama’s home state from the ravenous wolf that is outside their door. The GOP recently took over the House on the promise of fiscal restraint. These newly-elected GOP Congressman aren’t about to “let bad behaviour be tolerated ,much less rewarded” by the federal government in Washington. Therefore, the once unthinkable concept of a state declaring themselves financially insolvent so they can wipe their financial slate clean is now being talked about as “a very real possibility”. This ongoing muted federal conversation of “what may happen in the future” in the municipal bond market has already begun to impact the nation’s municpal bond market and it’s interest rates. This could be huge.

Comment by Pilgrim Tuesday, Jan 25, 11 @ 10:55 am
Rich, here’s your next topic in one of your play-along, snark heavily encouraged, games.

Finish this sentence:
Gov. Pat quinn specifically said last year that the state would not __________.

Comment by Joe from Joliet Tuesday, Jan 25, 11 @ 10:56 am
Pilgram, this just in …

The headline: No bankruptcy option for states, Cantor says

The link: http://www.washingtonpost.com/wp-dyn/content/article/2011/01/24/AR2011012406317.html

The lede: House Majority Leader Eric Cantor said Monday that he opposes changing the law to allow fiscally pressed states to seek bankruptcy protection, an idea that has been raised by some conservatives.

Comment by piling on Tuesday, Jan 25, 11 @ 11:01 am
- The latest bond rating by Moody’s is no surprise to anyone. The question, “Should state governments that have allowed themselves to get past the point of no return financially be allowed to declare bankruptcy?” -

Maybe you should try reading whole articles and not just headlines. Moody’s is waiting for the state to pass a borrowing plan, are you going to be surprised when they raise our rating afterward?

Comment by Small Town Liberal Tuesday, Jan 25, 11 @ 11:02 am
Bashing Illinois for the tax hikes is the wrong thing to do. Bashing New Jersey is also wrong. Both governors have taken a different path and have done so sincerely.

Wishing ill on one or the other because of how they are trying to help their states displays a narrow mindedness only blind ideologs could approve of.

It is ridiculous and petty to see this attitude here. We are in the same sinking ship.

Both states are awesome.

If we really care about solving our fiscal crisis, we need to shut up and pay attention to both gubernatorial approaches. Hopefully both Christie and Quinn will succeed and we could learn a few new tricks.

Comment by VanillaMan Tuesday, Jan 25, 11 @ 11:07 am
The tax hike is having its desired effect: the doom and gloom is starting to dissipate.

Only after we have some ammunition against it, will the doom and gloom dissipate, and we can get back to normal.

Comment by U-Haul Ho! Tuesday, Jan 25, 11 @ 11:08 am
–House Majority Leader Eric Cantor said Monday that he opposes changing the law to allow fiscally pressed states to seek bankruptcy protection, an idea that has been raised by some conservatives.–

Good for Cantor. Hopefully, he speaks for the House majority. Bankruptcy for the states is one of the most reckless and irresponsible ideas in a while.

Comment by wordslinger Tuesday, Jan 25, 11 @ 11:29 am
Right on, VM! I have been calling Quinn’s approach an “experiment” for weeks here on CapFax. We are seeing here in Illinois a classic application of the approach always called for by liberal economists.

The problem with analyzing the success of the experiment will be factoring out the effects of economic recovery that always eventually occurs at the end of a recession. Will the tax increase slow the recovery in Illinois? Will the tax increase speed up, or at least be neutral to the recovery in Illinois by addressing the structural deficit (if it indeed does)?

Illinois only comes out of the current recession when the pie of wealth grows, and allows increased revenue to the state. If Quinn’s tax increase and other actions he takes spurs growth, we’re in good shape. If not…

Somewhere, hopefully at the U of I, resides an undergraduate economics major who will study this for his PhD thesis.

Comment by Cincinnatus Tuesday, Jan 25, 11 @ 11:33 am
At least for today, I am changing my handle to “Snooki”. Perhaps “Gov. Snooki.” Simply too good to resist.

On that note, “Party’s here!”

Comment by S Tuesday, Jan 25, 11 @ 11:38 am
–If we really care about solving our fiscal crisis, we need to shut up and pay attention to both gubernatorial approaches.–

LOL, you first.

Comment by wordslinger Tuesday, Jan 25, 11 @ 11:38 am
Those Moody’s are a cantankerous bunch. God only knows what they are up too.

Comment by Moody Tuesday, Jan 25, 11 @ 11:56 am
Obviously I am.
We certainly cannot depend upon you.

Perhaps if you switched to Sanka like my grandfather did, you would be easier on everyone, especially Hooziers.

Comment by VanillaMan Tuesday, Jan 25, 11 @ 12:24 pm
A lot of folks your age cannot drink real coffee anymore. You can still stir in your daily Metamucil.

Comment by VanillaMan Tuesday, Jan 25, 11 @ 12:27 pm
Based on their illustrious history, I wouldn’t trust TRS with cab fare. If it is a case of choosing which is not being truthful, the academic or TRS, I’ll take the egghead .

Comment by Gregor Tuesday, Jan 25, 11 @ 12:49 pm
VMan, what age is that? Is there some age that a scholar like yourself discounts the source of an opinion?

And who is this alleged voice of sweetness and light that purports to be you? You’ve been awfully nasty and irrational over the years, bad-mouthing everything Illinois from your cozy little no-risk, taxpayer-funded bubble.

Comment by wordslinger Tuesday, Jan 25, 11 @ 2:53 pm
Rich, I don’t know if you remember or not, but the Rauh report came up here on your blog, as a result of a (misleading) article written about it that was referenced here on Capitol Fax by a commenter. I pointed out at the time that the article was inaccurate. Rauh was mainly writing about the esoteric academic question of what the discount rate should be for public pension funds. And, my understanding is that he has since commented that people shouldn’t equate that question with the question of anticipated rate of return on a system’s investment portfolio.

Comment by steve schnorf Tuesday, Jan 25, 11 @ 8:45 pm
It looks to me as though the allegations about the pension bonds are pretty serious. According to the Times http://www.nytimes.com/2011/01/26/business/26pension.html?hp
the state began calculating its pension obligation as if all workers were going to receive the reduced benefits that in fact only apply to workers hired after Jan 1 of this year. The SEC has gotten into the action because the incorrect accounting was used in the prospectus for the state’s pension bonds.

Comment by jake Tuesday, Jan 25, 11 @ 11:15 pm
Give it up, Vannie. You’re no match for the infamous Slinger.

Comment by Bill Wednesday, Jan 26, 11 @ 8:00 am