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No sign of abatement, but markets bounce anyway

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Illinois

* The pension reform standoff between House Speaker Michael Madigan and Senate President John Cullerton isn’t getting any less standoffish. Greg Hinz has quotes from each side on each others’ bills…

“We’re not going to put up that bill for a vote just for it to fail,” said Mr. Cullerton’s spokewoman Rikeesha Phelon, referring to a measure sponsored by Mr. Madigan that’s awaiting a Senate vote. “I think that would be viewed as a setback for reform.”

“(The Cullerton bill) is in the Rules Committee. There’s nothing to call,” said Steve Brown, Mr. Madigan’s spokesman. “The speaker has expressed a preference for (his bill). He thinks that’s the best course of action.”

* And Gov. Pat Quinn is attempting to send a message that he doesn’t like Senate President Cullerton’s bill, without actually coming right out and saying so, despite the best efforts of the Tribune editorial page…

He did offer that, “It’s short of what is needed.” When we pushed him on the veto question, about all he’d say is, “I don’t want to have an incomplete bill arrive” from the General Assembly. […]

He wouldn’t countenance the possibility of extending the session past May 31. “We’ve got to get it done,” meaning now, he told us. “I don’t want people thinking we ought to temporize some more.”

* The markets, however, seem optimistic…

Illinois debt is rallying the most since 2011 as investors bet lawmakers will end two decades of inaction and pass a measure to fix the worst-funded U.S. state pension system. […]

Taxable Illinois pension-obligation bonds maturing in June 2033 yielded 2.29 percentage points more than benchmark Treasuries May 13, four days after the Senate bill was approved, data compiled by Bloomberg show. That’s the smallest penalty since August 2011, when Standard & Poor’s rated the state two steps higher than its current A- grade.

But…

“I would think they get a compromise this time — the market will be pretty disappointed if they don’t,” said Tim McGregor, who oversees about $30 billion as director of municipal fixed-income at Northern Trust Corp. in Chicago. “Spreads have rallied in on the news, and they could widen pretty quickly if they don’t come to terms with anything.”

Discuss.

posted by Rich Miller
Tuesday, May 21, 13 @ 9:33 am

Comments

Based on yesterdays news SB 2404 could pass after May 31. So if there is pressure it can pass later there is no urgency
The bounce may be because the Illinois backlog is falling fast w/o pensions and the ramp eases in a couple of years anyway as someone posted yesterday so bond holders realize they will get their payments no problem

Comment by RNUG Fan Tuesday, May 21, 13 @ 9:41 am
Maybe the compromise is SB2404 and pass the Cost Shift. SB1 “saves” the system $150 billion through 2045. SB2404 “saves” the system $50 billion through 2045. The Cost Shift “saves” the State $22 billion through 2045 (the sum of Normal Cost for SURS and TRS through 2045 in the COGFA pension report).

Combine the savings from SB2404 and the Cost Shift gets you about $70 billion.

I know it is still only about half of SB1 - but better than 1/3.

Comment by archimedes Tuesday, May 21, 13 @ 9:42 am
I doubt if investors are really following the blow-by-blow accounts of the pension debate. I suspect they’re just looking for some kind of return from bonds. Right now, rates are so low that if you’re parked in T-Bonds, you’re losing money.

Those in the market are hardly risk-averse at the moment; they’re pouring money into a stock market that’s at a record high and IPOs, too. Gotta get some kind of return on your cash.

Comment by wordslinger Tuesday, May 21, 13 @ 9:45 am
==because the Illinois backlog is falling fast w/o pensions ==

The backlog is going to go back up. The reason it is falling is that they are spending down all of the income tax revenue the state got in April. The Comptroller has testified to this fact and indicated the reduction is temporary.

Comment by Demoralized Tuesday, May 21, 13 @ 9:51 am
So degrading to see the trust fund ed board grovel. MJM is confident that he wants this off his plate and if that means passing an unconstitutional bill that throws teachers and retiree benefits in the toilet so be it.

Comment by Obamas Puppy Tuesday, May 21, 13 @ 9:55 am
Word,

I suspect you are right about investors chasing return. The little investors, like my mom and her investment club, spend a lot of time complaining about the low interest rates on savings and CDs, and looking for higher returns … and are putting money into “riskier” investments.

Comment by RNUG Tuesday, May 21, 13 @ 10:02 am
“Illinois expects to close out fiscal 2013 with $1.3 billion more in income tax revenue than previously projected, offering investors a rare bit of positive state financial news just ahead of a $300 million sales tax backed bond sale…” The Bond Buyer - May 21, 2013

Comment by Ruby Tuesday, May 21, 13 @ 10:07 am
Looking at the bond markets for a single day is like my sister following the level of her 401(k)every day while still being twenty years from retirement. The major impact is if they pass a bill into law that makes a firm positive step — like 2404. I think SB1 would only be a holding action because of its dubious (at best) constitutionality.

Comment by Bobbysox Tuesday, May 21, 13 @ 10:44 am
Funny all the Wall Street hustlers started calling yesterday. Sounded like mostly short sellers
They were “worried” about there only being 9 days left. Pension systems and Board of Investment really should rein these cheats in.

Comment by CircularFiringSquad Tuesday, May 21, 13 @ 10:44 am
Interesting to read all the legal scholars, who know SB 1 is unconstitutional. I would suspect these folks are directly impacted by the proposed pension reforms.

Comment by Downstater Tuesday, May 21, 13 @ 10:56 am
Downstater, if you read more you would better understand our basis for that opinion. Rather than make derisive statements about people who have researched the topic try reading more yourself. Start with this paper from Eric Madiar, the likely drafter of SB 2404.

//www.google.com/url?sa=t&rct=j&q=madiar%20pension&source=web&cd=1&ved=0CC0QFjAA&url=http%3A%2F%2Fwww.senatedem.ilga.gov%2Fphocadownload%2FPDF%2FPensionDocs%2Fmadiarrevisedpensionclausearticle.pdf&ei=MpubUfjwKumfyQHc8YDwCg&usg=AFQjCNE9ZRz6D7m93bvN2hseVPJJf8DQKA&bvm=bv.46751780,d.aWc

Comment by Norseman Tuesday, May 21, 13 @ 11:16 am
Downstater -

What part of “shall not be diminished” don’t you get? SB1 is clearly unconstitutional on its face - the supremely arrogant, dubious argument is the state’s “police powers” trump this constitutional guarantee. And, that won’t work - there are plenty of alternatives to the unconstitutional SB1, none of which (yet) are politically palatable.

Comment by Algonquin J. Calhoun Tuesday, May 21, 13 @ 11:18 am
Whether any of you want to admit it or not the fact is that NONE of you know what is or isn’t Constitutional because the courts haven’t told us yet. All people have are conjecture and opinion but in the end none of your opinions matter. You will NEVER pass anything because somebody is always going to make the argument that whatever they are considering is unconstitutional. Some of you will never consider any bill put forth to be constitutional.

Comment by Demoralized Tuesday, May 21, 13 @ 11:24 am
We might not KNOW it for sure Demoralized, but if it walks like an unconstitutional duck, and quacks like an unconstitutional duck, then it’s likely unconstitutional. And while no one can KNOW, we have offered our opinions? Do you have one on SB1’s constitutionality? Simple question.

Comment by PublicServant Tuesday, May 21, 13 @ 11:33 am
@Public:

I have a vested interest so I’m not happy in general about what I will ultimately face because I believe in the end they will do something that will negatively affect my retirement. I’ve moved beyond thinking something is or isn’t Constitutional. Part of me wishes they would pass something that “appears” to be less Constitutional than other options, not for the sake of delaying pension reform, but for the sake of seeing how far the Supreme Court is willing to let them go in that reform. Until we know for sure then I find it not a good use of my time lamenting about whether something is Constitutional or not.

Comment by Demoralized Tuesday, May 21, 13 @ 11:40 am
We’re not lamenting Demoralized. Just stating what we believe the truth to be. Don’t worry, you’ll get your wish. They’ll pass something, and when they get spanked, maybe they’ll finally consider and employ some, or all, of the constitutional options that have been discussed ad nauseum on this blog. But I expect that we’ll certainly see the courts get something soon, and then we’ll see whether the United States and Illinois truly believe in the rule of law, or whether the state can unilaterably alter “an enforceable contract” based on selectively invoking police powers to address a crisis of their own making.

Comment by PublicServant Tuesday, May 21, 13 @ 11:50 am
SB1 must be passed a.s.a.p. How will the fast food restaurants be sufficiently staffed if the promise of a comfortable retirement is not taken away from these potential “associates” a.s.a.p.?

Comment by C. Montgomery Burns Tuesday, May 21, 13 @ 11:55 am
It seems that the $90B-$100B pension figure is sometimes presented as if there is no existing plan at all to cover it. According to the COGFA June 2012 report, “If the State continues funding according to current law…” (which State has done the past couple of years) COGFA’s projection is “the funded ratio is expected to increase from 39.0% in FY 2012 to 90.0% by the end of FY 2045″ with 90% in 2045 being the current requirement according to PA 88-0593.

The obvious problem is that with the temporary income tax increase in place, making the annual payments is currently squeezing the budget.

However it seems unjustified to make the situation appear worse by jumping to 100% coverage now, front-loading payments (as in Martire proposal), assuming the temporary tax increase will go away, and excluding the potential for increased payments when pension bonds are paid off and when normal costs are transferred to universities/districts.

If savings from SB2404 are combined with assuming greater contributions when the bonds are paid off and when normal costs are shifted, is the total short-term possible reduction in annual pension contributions $1.5B or so?

The question is whether the State budget is manageable with these assumptions and savings along with increased revenues from economic recovery, gambling, and possibly the Internet sales tax. If so, then pass SB2404, pass the cost shift, create a payment ramp that takes into account both the cost shift and the bond repayment, and be satisfied for now. Making changes to revenue to account for future needs such as ACA can wait for another day.

Comment by east central Tuesday, May 21, 13 @ 12:36 pm
OMG combine the bills, make Cullerton’s the fallback, and be done with it.

Comment by Bush Twins Tuesday, May 21, 13 @ 12:55 pm
==maybe they’ll finally consider and employ some, or all, of the constitutional options that have been discussed ad nauseum on this blog==

How do you know if they are constitutional or not? That’s my point. Nobody knows that. I find it funny how people are declaring certain things constitutional or unconstitutional. As I said, give something to the judges so we can see what the parameters are and stop playing judge.

Comment by Demoralized Tuesday, May 21, 13 @ 2:10 pm
=== OMG combine the bills, make Cullerton’s the fallback, and be done with it. ===

From the coalition’s standpoint, this would have to be a deal breaker. They negotiated with the idea of preventing Madigan’s bill.

Comment by Norseman Tuesday, May 21, 13 @ 2:12 pm
***==maybe they’ll finally consider and employ some, or all, of the constitutional options that have been discussed ad nauseum on this blog==

How do you know if they are constitutional or not? That’s my point. Nobody knows that. I find it funny how people are declaring certain things constitutional or unconstitutional. As I said, give something to the judges so we can see what the parameters are and stop playing judge.***

Because they don’t run contrary to the plain language in the constitution. Nor have there been any adverse court cases addressing fact situations similar to the provisions of these bills. The same can’t be said about either SB 1 or SB 2404 - although the premise of 2404 is that the constitutional diminishment can proceed because there would be a contractual acceptance by some pension system participants of “consideration” in exchange for that diminishment.

You are correct that the final outcome final determination of a measure’s constitutionality will be made by seven Illinois Supreme Court justices. We can hope and pray that this determination is based upon legal principles and not politics. That fact does not and should not stop us from pointing out the valid concerns about the constitutionality of these proposals.

You may not care about the plain language in the constitution or the multiple court cases that point out faults with these bills, but that is your prerogative. You have accepted this mockery. I and most others affected have not. We’re going to fight this injustice as long as we can until the General Assembly accepts the alternatives that don’t target current workers or retirees.

Comment by Norseman Tuesday, May 21, 13 @ 3:05 pm
Norseman,

I think we are pretty aware of your perspective on pension reform. I think it is important for you to acknowledge that many if not most of the citizens of the state of Illinois do NOT view pension reform similarly. You should think about that. Although the majority of people on this website do feel similarly to you.

Legislators need to take into account the perspectives of the various constituencies across the state of Illinois, they need cross match that with legislation that can actually make a difference in the fiscal problem and then make the best decision that they can.

Although it will be good for you personally, it wont do the remainder of the state of Illinois any good to pass legislation that wont help solve the financial morass this state is in.

Comment by biased observer Tuesday, May 21, 13 @ 3:45 pm
State officials take an oath to support the constitution. What they need to do and what I expect is for them to fulfill that oath and abide by the constitution.

Comment by Norseman Tuesday, May 21, 13 @ 4:22 pm
We have laws, constitutions, and courts so that “most” of the citizens do not violate the rights of the rest of us.

Comment by skeptical Tuesday, May 21, 13 @ 4:32 pm
CFS has an interesting point above, with no decoder ring required lol.
Passing a pension bill will move the needle on current IL bonds, so the sharks are likely in the water looking for easy money on short sales. Jerks.

Comment by Arthur Andersen Tuesday, May 21, 13 @ 4:35 pm
many people believe madigan is constitutional.

Comment by unbiased observer Tuesday, May 21, 13 @ 5:21 pm
It was another all time record high closing for the stock market today, a good sign that the value of Illinois pension funds will end in positive territory for the FY 2013.

Comment by Ruby Tuesday, May 21, 13 @ 5:24 pm
If the Supreme Court upholds any reduction in pension benefits based on Madigan’s fiscal crisis argument, expect many more future reductions. Illinois will be in fiscal crisis for years to come.

Comment by OLIVE Tuesday, May 21, 13 @ 6:01 pm
Many people from my parent’s native state thought it was “constitutional”….awww, forget it.

Comment by Six Degrees of Separation Tuesday, May 21, 13 @ 6:22 pm
Demoralized,

We are not guessing. These are not just our opinions. You can read Eric Madiar’s 76 page analysis of the history of pensions in Illinois including the court cases since 1970. If you want to be more informed on this issue, I would suggest you read it. (Link was provided on an earlier post.

The courts (at both the appellate and supreme court level) have already ruled on several pension issues. They have ruled that the “contract” of the contractual relationship is the pension code in the Illinois Compiled Statutes. They have already ruled that any direct reduction in benefits (as defined in the pension code) is a violation of the pension clause. So when we say Madigan’s bill is unconstitutional, That is not just our opinion. We are not just guessing based on hope. Our observations are derived from previous court rulings on pensions. We do know how the courts have ruled in the past, and we have confidence they will use previous court rulings as a guide when deciding these issues in the future. While this is not a guarantee, it will be a major factor in the outcome of future pension lawsuits and future court decisions.

Comment by KurtInSpringfield Wednesday, May 22, 13 @ 7:47 am