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* UPDATED x1 * George Will: Investor perceptions require stripping unions of power

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* From George Will’s latest column, which is kinda sorta about Illinois’ many problems…

Peterson, a professor of government at Harvard, and Nadler, a doctoral candidate also at Harvard, say collective-bargaining rights for government employees pose “a dramatically new challenge to the viability” of American federalism.

They cite studies demonstrating that investors’ perceptions of risk of default are correlated with the rate of unionization among government employees. [Emphasis added.]

So, some Wall Street “perceptions” mean that states ought to get rid of collective bargaining rights? There never would’ve been unions in the first place (not to mention a whole lot of other stuff that we take for granted) if governments had always followed Wall Street perceptions.

Then again, the bond market has pretty much dictated almost every big piece of fiscal legislation passed in this state for the past two years.

*** UPDATE *** Along these same lines, this is pretty crazy…

California, the world’s ninth- biggest economy by output, pays more to borrow from investors than John Deere Capital Corp., Idaho Power Co. and Caterpillar Inc., which have the same or lower credit ratings.

Two years after Moody’s Investors Service and Fitch Ratings changed standards to put municipal credits on the same footing as corporates, California and Illinois are among states that still pay more for debt than similarly or lower-rated corporations, according to data compiled by Bloomberg. Yet Moody’s says companies default at 86 times the municipal rate. […]

Defaults by governments remain fewer than those by corporate borrowers. Only 0.13 percent of municipal bonds rated by Moody’s fell into that category from 1970 to 2011, compared with more than 11 percent of corporate bonds. […]

Illinois, which like all states has the ability to impose taxes to raise revenue and whose bondholders have a first claim on the money, also hasn’t received lower yields.

The A2 rated state sold taxable bonds Jan. 11 with a yield about 132 basis points more than debt issued by Central Hudson Gas & Electric Corp. two months later, relative to 30-year Treasuries. The Poughkeepsie, New York-based company serves about 300,000 electric customers between New York’s northern suburbs and Albany, the state capital. It is rated lower, at A3, and its securities mature five years later.

posted by Rich Miller
Wednesday, Apr 25, 12 @ 11:10 am

Comments

Disgusting. And ironic, because big corporations and the ratings houses are doing exactly what they say working people should have no right to do: take collective action to improve their condition, and if necessary withhold something of value.

Workers get together in unions and bargain collectively for fair wages, decent benefits, safe working conditions and in the case of public employees, strong public services from which every Illinois resident benefits. In extremely rare instances they use the threat of a work stoppage — a labor strike — to secure these ends.

The Caterpillars and CMEs and other big corporations get together in lobby associations like the Commercial Club and the Chamber (and, increasingly, front groups like Illinois Is Broke and the Illinois Policy Institute) to drive down their own taxes and oppose regulation. They use the threat of relocation (in the case of corporations) or capital strike (by ratings houses and lenders) to enforce their aims.

How hypocritical that global corporations, their CEOs and Wall Street special interests think nothing of advancing their narrow profit-grabbing agenda with rights they seek to strip from working people whose interests are basic fairness and the public good.

Comment by Reality Check Wednesday, Apr 25, 12 @ 11:22 am
Unions are not the problem, collective bargaining is essential for workers to have a say in their work place. The Problem include elected officials who have not balanced their budgets and have kicked the can down the road for too long.

Comment by Union Wednesday, Apr 25, 12 @ 11:33 am
Thank you Reality Check! Unions and collective bargaining have created the middle class and the middle class is eroding precisely because of political agendas like this.

Comment by Anon Wednesday, Apr 25, 12 @ 11:33 am
Since Blago took over, there are more & more union workers PSAs etc. Why the increase in numbers in this day & age? Partially due to no raises for years. Pay at executive agencies is at an all time high for example - look at IDOT salraries. I don’t see the need in most positions.

Comment by Dawn G. Wednesday, Apr 25, 12 @ 11:40 am
George Will should stick to showing off his vocabulary talking about baseball and leave this “politics” stuff behind. Never been impressed by his analysis on anything, despite reading everything he’s written for 15 years. I’m sad to say we share an alma matter.

Comment by Colossus Wednesday, Apr 25, 12 @ 11:47 am
Wait…. the bond rating companies have no credibility? I’m shocked!

Comment by Aaron Wednesday, Apr 25, 12 @ 11:58 am
Will’s column is what sportswriters would call out-of-town stupid.

There’s Will’s alleged “perceptions” and reality.

The reality is that investors oversubscribe to Illinois debt and the state has never missed debt payment in its history.

Then, there’s this:

–Illinois was more heavily taxed than the five contiguous states (Indiana, Kentucky, Missouri, Iowa, Wisconsin) even before January 2011,–

Not so you’d notice. Even after the tax increases, the top rates in all bordering states (when you factor in Indiana’s local income taxes) are higher than Illinois.

http://www.taxadmin.org/fta/rate/tax_stru.html

And this:

–..raise corporate taxes 30 percent (from 7.3 percent to 9.5 percent), giving Illinois one of the highest state corporate taxes, and the fourth-highest combination of national and local corporate taxation in the industrialized world.–

Sounds pretty scary, except that 2/3 of Illinois corporations don’t pay any income tax at all.

Comment by wordslinger Wednesday, Apr 25, 12 @ 12:06 pm
There’s reasons why private corporations have superior financing options. I remember a specific set of conversations with investment officers back in December, 2010 in regards to government financing. It was clear at the time they they were seeing an eventual contest for supremacy between bondholders and employee retirement/pension obligations.

They weren’t looking at past history, they were looking forward. And they were seeing a collision course, and they didn’t think they were going to win (holders of bonded indebtedness have always held seniority status in terms of default, up until GM), but they didn’t think that would continue to hold in the government financing area.

They were anticipating that politics were going to win out over economics - at least for a while.

They were not making a big deal out of it, but it was certainly on their minds at that time. And IMO, doubtful they have seen anything to change that outlook.

The good news is that they are still buying government bonded indebtedness, but these days they are acting more as ‘prudent investors’. In California, they are attempting to price in what is currently an unknown level of risk. My fear is that the same process will start to be applied to the State of IL.

If California doesn’t like the prices being set in the marketplace, they need to get their funding somewhere else.

Comment by Judgment Day Wednesday, Apr 25, 12 @ 12:17 pm
By itself, unionization in a state should not pose a risk to federalism or the investment market’s perception of a state. It’s when government employee unionization corrupts a state’s politicians with campaign contributions that the scenario changes. The resulting wage,employment security, pension and retirement health care deals create a long term fiscal drag which long term bond investors view as a default risk, especially in today’s economy. Add in that a state’s power to tax is not infinite and most politicians’ primary instinct is to get re-elected, the ratio of historical defaults in the private sector as compared to the private sector is irrelevant as we go forward in an aging America. And, let’s not forget that a state’s finances are much more opaque than a publicly traded company’s. I’ll take a lower rated private corp bond than a bond issued by union financed governments like Illinois and California every time.

Comment by Cook County Commoner Wednesday, Apr 25, 12 @ 12:18 pm
number will come out one of these days, but I think it is a pretty safe assumption that “2/3 of Illinois corporations don’t pay any income tax at all” because they don’t make any money. And (aside from a tough business climate) they don’t make any profit because we/they move our profit out of Illinois to a lower tax state.

Comment by Backwards Wednesday, Apr 25, 12 @ 12:19 pm
Believe me, I’m not a union fan … in spite of having come from a family where my fater and grandfather were part of founding a union local. And after dealing with the bad side of union workers during my career, I never thought I would write somethign supporting them. But Will is way off base; unions are needed to balance the politicans and corporations who don’t care a whit about the workers in both government or private enterprise.

In the old days unions fought for and won a lot of improvements in the workplace and helped create the middle class (along with the actions of Henry Ford who made sure his workers could afford the products they were building). But these days unions have wandered from their purpose. I wouldn’t mind unions sticking to just wage and workplace safety issues but I don’t think unions should be eliminated. It took both the worker and the businessman to build this country, but those businessmen had vision (even if some of them were robber barons). Unlike those businessmen who built the country, corporations today don’t care about anything but the bottom line and they can pretty much spend unlimited money bribing the politicans via campaign contributions to get rules favoring them. Without the unions, government employees would be nothing but slaves working for whatever crumbs were left.

Comment by Retired Non-Union Guy Wednesday, Apr 25, 12 @ 12:28 pm
Word:

Have to disagree. You may not like George Will, but what he has in his column isn’t far from what a large portion of the investment class is thinking. Just because we as the State of IL have been able to borrow up until now doesn’t mean that it’s going to continue under the same sets of rules.

Think about it. You have a client who wants to issue long term bonds to fix a current operating funding ‘issue’, but at the same time is stiffing creditors to the tune of very large dollars who are the same people who are providing the goods and services necessary for continuing current operations?

Got to tell you - in the investment community, that whole approach raises a whole lot of red flags all over the place.

Comment by Judgment Day Wednesday, Apr 25, 12 @ 12:29 pm
Regarding the Update:

Though I wouldn’t count on Rutherford to take the initiative, states and municipalities could assume greater control of issuance costs and interest expense by taking advantage of this wild new internet contraption to reach investors directly.

Start the end around the ratings houses and “too big to fail” underwriters.

The change could coincide with strengthening audit standards for crowd funding in all sectors.

Comment by Kasich Walker, Jr. Wednesday, Apr 25, 12 @ 12:44 pm
well if it is the perception then it is in part the reality. You may not like that but the state has to borrow to run at this point. Yeah state debt is oversubscribed because in part the rate we are paying.
there are suburban school districts that will not buy state debt because of the perception of risk.

like Rich has said the bond market, aka the states need to borrow is driving all sorts of things now

Comment by oneman Wednesday, Apr 25, 12 @ 12:55 pm
Aggregation rules seems to make sense. Gaming the system should be discouraged.

I don’t get why you would want to conceal the fact that you are loaning yourself money to fund your campaign.

Comment by Plutocrat03 Wednesday, Apr 25, 12 @ 1:08 pm
“…states and municipalities could assume greater control of issuance costs and interest expense by taking advantage of this wild new internet contraption to reach investors directly.”

First off, NOBODY with have a brain is going to currently purchase ‘unrated’ (and by definition, ‘unlisted’) local/state government bond issues.

That would be like buying shares in “The Bank of Sark”. (Hint: Doesn’t exist, never did - bunch of investors lost A LOT of $$$$ on that scam).

You’ve hit a serious problem, though. The bond market isn’t transparent - it’s opaque, and that’s being viewed through a fog bank.

And that’s the way the banksters, ratings houses, and underwriters want it. Transparency creates increased competition, and drives down prices.

Ask yourself a question: Any federal agency spending more than $100 mil yearly in R&D has to provide and fund a program (10% of all R&D money) for small businesses and startups to fund operations in return for R&D work in areas under the authority of the specific department of government.

We have USDA, all areas of US DOD, all the alphabet (security) agencies, FBI, DHS, EPA, Interior, Energy, Education, etc, etc.

Guess what two areas a conspicuously absent from the roll:

US DOJ
ALL the Financial agencies (Treasury, SEC, FHA, etc.).

Why do you think that is?

How about because they (neither regulated or regulators) don’t want any creative type thinking going on like “why not have local and state governments handle and advertise their bonded indebtedness marketing directly to investors over the Internet”.

That would mean that both the banksters/Wall Street types -and- the dead head federal bureaucrats would lose control.

Treasurer Rutherford has nothing to do with it.

Comment by Judgment Day Wednesday, Apr 25, 12 @ 1:14 pm
“The state of Illinois owed vendors, hospitals, local government, schools and others nearly $5.6 billion at the end of March….”

So begins an informative yet “what else in new” SJ-R piece by the talented Chris Wetterich.

$5.6 billion is about what has been taken out of Illinois every year for the past dozen to pay for wars in Iraq & Afghanistan.

But it’s Illinoisans, not George Will, suffering from “reality aversion”.

Comment by Kasich Walker, Jr. Wednesday, Apr 25, 12 @ 1:24 pm
– “$5.6 billion is about what has been taken out of Illinois every year for the past dozen to pay for wars in Iraq & Afghanistan” –

Huh? No money at all has been taken out of Illinois, or any other state, for that matter. Those wars have been “paid” for by federal borrowing, much of it from China. Yes, it will have to be repaid someday, but that day has not yet arrived.

Comment by cover Wednesday, Apr 25, 12 @ 2:03 pm
“…it will have to be repaid someday, but that day has not yet arrived.”

And that day hasn’t arrived because Fed borrowing can continue without the credit raters relied upon by the too big to fails blowing gaskets like they do when a state with Dem leadership wants to borrow for extravagances like teacher pensions and medicare instead of military occupation — security for the upcoming NATO summit excluded.

I get your point Cover, but when the Fed diverts funds elsewhere — borrowed or not — money going there is not getting back here.

Comment by Kasich Walker, Jr. Wednesday, Apr 25, 12 @ 2:28 pm
Good reporting. This does suggest there is something structurally wrong with the bond market if states and municipalities are paying more than corporations. It does seem kind of ridiculous that we collect billions in our pension funds (local and state), then hire fund managers to take our money and buy equities and bonds, and then somehow the people who are managing those funds end up charging cities and states more to borrow money than corporations.

There is something structural under the surface. Not sure what yet.

Comment by Dan Johnson Wednesday, Apr 25, 12 @ 2:37 pm
perhaps the ratings are not as meaningful as thought, and investors use their own judgment as to credit risks and returns. John Deere quits paying bondholders, their equipment is collateral. The State stops paying bondholders, and the investor just has to accept any delay, or end up in a terminal court proceeding.

Comment by Backwards Wednesday, Apr 25, 12 @ 2:42 pm
Rich:

Gee, how could we exist in Illinois without unions? Apple Computer is now the biggest company in the S&P 500 by market capitalization: all without unions. Wal-Mart became the nation’s largest retailer : all without unions. If unions are so concerned with the “public interest” why do they make campaign contributions to politicians that overpay them?

Comment by Steve Bartin Wednesday, Apr 25, 12 @ 2:51 pm
george will doesn’t understand our economy. i don’t think that’s news (but, this being america, he is free to have an opinion, even if it is wrong)…

Comment by bored now Wednesday, Apr 25, 12 @ 2:57 pm
JD, when it comes to state debt, there really are no “underwriters” anymore. Everything’s pre-sold. They get their half a point to a point for churning out some boilerplate — and bundling campaign contributions.

Comment by wordslinger Wednesday, Apr 25, 12 @ 2:59 pm
Steve Bartin: i always laugh when people start talking about tech companies and noting that they aren’t unionized. there’s a reason for that: tech companies pay good salaries and have exceptional benefits. if other companies treated their employees as well, there wouldn’t be much need for unions. but tech companies have to actually compete for COMPETENT, highly skilled talent (talent which has a propensity for leaving and starting competing ventures). i wouldn’t object to the government mandating that all companies treat their employees like apple does.

walmart, otoh, is aggressively anti-union and anti-worker. they treat their employees like crap and they destroy competing businesses so that they can get away with it. walmart is a cancer on our society, and using it as an example of how companies succeed only reinforces walmart’s race to the bottom and its commitment to make the united states a third world country…

Comment by bored now Wednesday, Apr 25, 12 @ 3:03 pm
And JD, the discrepancy between what state governments and similarly rated corporates pay is not borne of any market rationality.

States have taxing powers. States are obligated by law to pay debt first. States can’t walk away from their bonds in bankruptcy court.

–Defaults by governments remain fewer than those by corporate borrowers. Only 0.13 percent of municipal bonds rated by Moody’s fell into that category from 1970 to 2011, compared with more than 11 percent of corporate bonds. […]–

The rating agencies are setting a rigged game by rating any state anywhere near much riskier corporate debt.

Comment by wordslinger Wednesday, Apr 25, 12 @ 3:09 pm
george will waxes on about the Cubs. I pay no attention to him about that either.

Comment by amalia Wednesday, Apr 25, 12 @ 3:15 pm
–I’ll take a lower rated private corp bond than a bond issued by union financed governments like Illinois and California every time.–

Interesting strategy. How’s your investment grade Enron, WorldCom, Lehman Bros and MSD paper looking these days?

If only banks and corporations had some influence over state governments, these bad old unions wouldn’t be running roughshod over everyone.

What galaxy is that happening in, again?

Comment by wordslinger Wednesday, Apr 25, 12 @ 3:46 pm
“2/3 of Illinois corporations don’t pay any income tax at all.”

This gets thrown around a lot. I want to see the source. Does it include S-Corps, LLCs, LPs, etc. (who pay taxes in a pass-through manner)?

I’m betting it does. And if so, maybe you should change your talking point to “2/3 of corporations don’t pay income taxes twice.”

Comment by J Wednesday, Apr 25, 12 @ 3:49 pm
J, here you go.

tax.illinois.gov/AboutIdor/TaxResearch/ILBusTaxIncectives.pdf

http://progressillinois.com/posts/content/2011/12/15/corporate-tax-dodge-report-reveals-millions-lost-illinois

Comment by wordslinger Wednesday, Apr 25, 12 @ 4:36 pm
“First off, NOBODY with have a brain is going to currently purchase ‘unrated’ (and by definition, ‘unlisted’) local/state government bond issues.”
+++++++++

Let me put it another way: I wouldn’t opt out because of anything George Will wrote.

If the Feds would allow current FDIC deposits to receive protection up to similar limits per investor when those deposits are used to purchase the “State of IL Savings Bond” and the interest offered by the State was a bit better than those holders currently get with their CDs, why not buy? Because you don’t want to hurt the bankers?

Prep big and small investors with a promotional budget one-twentieth the size given over to push the state’s lotto.

I wonder how long it would take to raise $1.8 billion.

Comment by Kasich Walker, Jr. Wednesday, Apr 25, 12 @ 5:32 pm
Kasich Walker Jr is on to something. It does seem like the bond market is structured to be a ripoff for the state, and we could conceivably raise the money we need by cutting out the Wall Street middlemen. I don’t understand enough about how the bond market works, but it does seem like a big ripoff. I mean, how much bond counsel work do we really need for essentially the same transaction? And what do these issuers really do? Why can’t we just offer an Illinois Savings Bond to Illinois residents to buy and save the fees?

Comment by Dan Johnson Wednesday, Apr 25, 12 @ 5:56 pm
Right, no unions and Wall Street running the country, that’s what we need. Think the Great Depression was a bump, or the Bush ‘recession’, wait til Wall Street gets total control of our economy. 1% eating steak, 99% eating Alpo.

Comment by Flan Wednesday, Apr 25, 12 @ 7:41 pm
“…when it comes to state debt, there really are no “underwriters” anymore. Everything’s pre-sold. They get their half a point to a point for churning out some boilerplate — and bundling campaign contributions.”

Word, your point being the the entire system for processing tax exempt bonded indebtedness is riddled with conflicts of interest, unethical behavior, if not actual corruption?

That’s almost a given these days. That’s why we need a really functional clearinghouse for tax exempts nationwide. The first step would be to require the ABA (American Banker’s Association) to completely turn over all rights to the CUSIP (http://www.emma.msrb.org/Search/Search.aspx) bonded indebtedness database/system over to the Municipal Securities Rulemaking Board.

You might want to take a look at who runs the CUSIP service bureau - none other than Standard & Poor’s Financial Services LLC.

Crony capitalism at it’s finest.

Comment by Judgment Day Wednesday, Apr 25, 12 @ 8:39 pm
Kasich Walker Jr.

Btw, if you think it’s such a great idea (and btw, it’s not bad), why don’t you talk to Dick Durbin or Chuck Schumer to have then take the lead on the idea in the US Senate?

You’ll get an education….

Comment by Judgment Day Wednesday, Apr 25, 12 @ 8:44 pm
JD and KW, I think we’re all a little closer to agreement than it might appear at first blush.

KW, I think you’re absolutely right that you could market state debt without the underwriters.. and the financial advisors… and the bond counsel… and everyone else who bundles contributions in “negotiated” sales.

JD, back in the day, when communications were the mail on ships, or the telegraph, you needed underwriters. They are no longer necessary, and have not been for a very long time.

What, actually, do they bring to the party? Not the idea. Not the revenue. Not the investment. They are parasites.

JD, why couldn’t you put out a state bond issue Official Statement online, and let investors bid? Everyone knows what a GO bond looks like. Hell, give Chapman and Cutler .01 if it makes you feel better.

I think one of the least understood developments in our lives, even after September 2008, is how much power we’ve allowed financiers to achieve and how badly they’ve screwed it up.

I was a Midwest boy for Wall Street media for 10 years. But I’ve been a Midwestern boy for a lot longer. Those guys arent’ about market rationality, or community, or democracy, they’re about hosing you for the juice.

They’re supposed to take their juice and shut up. Instead, these non-productive nobodyies are running the show and screwing the pooch, all over the world.

Comment by wordslinger Wednesday, Apr 25, 12 @ 11:21 pm