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Illinois

Study: Fiscal ’scarlet letter’ costs state extra $80M

* From the story…

The study, conducted by DePaul University professor Martin Luby, a visiting researcher at the U of I institute, and Tima Moldogaziev of the University of South Carolina, set out to determine whether interest rates were even higher than other states’ rates in similar situations. They used a “’scarlet letter’ metaphor to note the hypothesized incremental risk premium demanded by investors on bonds that carry the name ‘Illinois.’” […]

“That’s above what the state should have been paying based on our worst-in-the-nation credit rating,” Luby said. “That’s one expensive reputation.”

OK, but we’re talking two-tenths of one percent, or about $16 million a year on average.

Yes, that money could’ve been better spent elsewhere, but it’s not a hugely gigantic pile of cash in the state’s overall budget.

posted by Rich Miller
Monday, Mar 10, 14 @ 2:30 pm

Comments

I’m sure JBT would disagree. That $80 million could have paid some vendors who are cash strapped because of the backlog.

Comment by Empty Chair Monday, Mar 10, 14 @ 2:39 pm
Couldn’t agree more– cut out corruption and sweetheart deals sqq priceless!

Comment by funny guy Monday, Mar 10, 14 @ 2:42 pm
Sure it’s relatively small in the overall state budget, but $16M certainly could have paid for a few more anti-violence grants or other legislative minority caucus grants.

Comment by Budget Watcher Monday, Mar 10, 14 @ 2:52 pm
- “OK, but we’re talking two-tenths of one percent, or about $16 million a year on average….but it’s not a hugely gigantic pile of cash in the state’s overall budget.”

I guess I am wired differently, I just don’t think like that.

Comment by Bobby Hill Monday, Mar 10, 14 @ 2:57 pm
Yeah……16 Million is chump change. No need to be concerned.

Comment by John A Logan Monday, Mar 10, 14 @ 2:59 pm
That’s an accounting error in Healthcare and Family Services.

Comment by Norseman Monday, Mar 10, 14 @ 3:07 pm
Read carefully.

===interest rates were even higher than other states’ in similar situations.===

What they’re saying is that the rating agencies are overstating Illinois’ risk.

Being unreasonably cautious, probably due to their previous errors.

Comment by Walker Monday, Mar 10, 14 @ 3:14 pm
Their “red letter” (think “A”) is sardonically expressing an unfair, unwarranted, image-based rating.

Comment by Walker Monday, Mar 10, 14 @ 3:17 pm
===Illinois paid a “risk premium” based solely on buyers’ perception of its credit stability. The credit rating has worsened since then.===

I’m not confident that the risk premium was out of line given that the rating has worsened. Sounds like they were building the potential for a worsening rating into the price, which was not a control point for the study.

Comment by DrVoodoo Monday, Mar 10, 14 @ 3:24 pm
don’t all these not hugely gigantic piles kind of add up? I’m with Bobby H. as long as any waste is too small to worry about the institutional spiral keeps on rollin.

Comment by just asking Monday, Mar 10, 14 @ 3:26 pm
Puerto Rico to Sell $3 Billion GOs on Tuesday

$3′Large’will be the largest muni deal ever. The new bonds will have a coupon that pushes 10% - and they will be priced in the hole to give the big-buck buyers a quick boost (retail investors will not see a dime of these bonds). These are tax free, so the fat cats will have a real yield pushing 16%! Thank you Uncle Sam!

The underwriters stand to make a quick $40+ million in fees. Come Tuesday night, the Champagne will be flowing.(I think the deal will be a blowout success the whole $3B was all spoken for as of Friday)

The best part of the deal(for the Street)is that the new bonds will be Senior to most of PRs other $70B of bonds. Thats because PR got rolled over a barrel and was forced to allow these bonds to be subject to NYS law meaning that the new bond holders can grab collateral, and force the other creditors to the back of the bus when the SHTF.

In my estimation, the $3B deal will buy PR at least 24 months before the next credit crunch hits. I have little expectation that PR is going to turn things around in that period of time, so the crunch will happen. But that’s so far away that PR, and its financial woes, will fall off the headlines. As that happens, the new bonds are going to rip up in value a 10% pop in these bonds is a distinct possibility. That would mean that come Tuesday, those who get to play in this sand box stand to rake in an �extra� $300m.

By Christmas, the new PR bonds will have been sold at big premiums over par to yield-hungry retail investors�(more Champagne). And the poor retail guys will be wondering what they bought sometime before 2017.

So Hurray for Wall Street and the moneymen. The fact that $3b can be raised for a troubled credit (that does not have a rosy future) is a measure of power. WS can do what the IMF cant provided it gets paid well for the effort.

Comment by What is to be done? Monday, Mar 10, 14 @ 3:40 pm
@DrVoodoo:

You might be right; but wouldn’t ==”building the potential for a worsening rating into the price”== undercut the value of rating agencies as well? What are they there for, if not to competently predict future risk at a given point in time?

Comment by Walker Monday, Mar 10, 14 @ 3:41 pm
While this is not the end of the world, it does remind me of an iconic Illinoisan.

To semi-quote Everett Dirksen: “A million here, a million there, and pretty soon, you’re talking about real money.”

$16 million here, $30 million there…

Comment by Formerly Known As... Monday, Mar 10, 14 @ 3:48 pm
@Walker:

I agree with that assessment, but rating agencies definitely signal changes before making changes, and they don’t necessarily make changes in real time. Investors will make their own assessments beyond the ratings agencies, as they should. There are even discrepancies in ratings between the agencies at any given time.

Of course, the ratings agencies credibility during that 2005-2010 period has been pretty substantially questioned post-financial crisis, and with good reason, so there is that.

Comment by DrVoodoo Monday, Mar 10, 14 @ 3:53 pm
@DrVoodoo: Upon reflection:

You’re right, I was wrong.

Not an uncommon position for me.

Comment by Walker Monday, Mar 10, 14 @ 3:55 pm
We Really need to pay our Bills! But if we wonder why we are in such bad shape. Its not the Pensions!!! It the gross mismanagement of tax payers money. How can a Governor use $54.5 million on an anti-violence campaign. This would have paid over 2/3 of the bills we owe. Then we cannot figure out where that some of the $54.4 million went. It looks like squeaky clean Pat may have been caught with his hand in the cookie Jar. Nobody cares, its public funds. Billions given to financial institutions, they don’t have to pay back. The Automobile bailout, not being paid back. Taxpayer fund just disappear and nothing is done. Until public officials are being held responsible for their actions, it will not stop. If there is no consequences public officials just keep giving out the cash. If they violate the public trust and misuse our money, somebody has to pay

Comment by $54.5 Million Monday, Mar 10, 14 @ 4:06 pm
That couldn’t even buy Pat Quinn votes on the South Side.

Comment by VanillaMan Monday, Mar 10, 14 @ 7:09 pm
$16 million is not a “huge pile of cash” ok send it my way then….this state has piles and piles of little piles of $16 million each…can this state get any more corrupt…ridiculous!!!!!!

Comment by concern1 Tuesday, Mar 11, 14 @ 4:29 am
Rich- If you are of the opinion that $16 million flushed down the drain to no purpose is no big deal in the great scheme of wasteful state spending, then perhaps you have been consorting too long with Illinois politicos. Their mentality may be rubbing off on you.

Comment by Skirmisher Tuesday, Mar 11, 14 @ 8:46 am
=== OK, but we’re talking two-tenths of one percent, or about $16 million a year on average.
===
=== Yes, that money could’ve been better spent elsewhere, but it’s not a hugely gigantic pile of cash in the state’s overall budget.

I keep telling the Illinois Department of Revenue that when it’s time to pay taxes, but they won’t listen. “It’s just a few thousand, and in the grand scheme of things it’s really not going to make a difference. Let me slide on it.”

But then they tell me that they have to pay for bad credit ratings because they thought they could keep writing checks as long as there were checks in the checkbook.

Comment by Stuff happens Tuesday, Mar 11, 14 @ 9:18 am
“A million here, a million there”? You know the rest of the story. Are you on the Pat Quinn PR crisis team Rich?

Comment by olok1973 Tuesday, Mar 11, 14 @ 9:30 am
I’d argue that the state’s bond rating is a lot less damaging to our economy and our budget than the incessant “Illinois is anti-business” from the business lobby.

Of course, if the “scarlet letter” bond rating bothers folks, the simple solution is to not borrow money.

Comment by Yellow Dog Democrat Tuesday, Mar 11, 14 @ 9:45 am
==simple solution is to not borrow money==

And how do you suggest we take care of capital needs, like building roads? You can’t just stop borrowing money.

Comment by Demoralized Tuesday, Mar 11, 14 @ 9:48 am