Capitol Fax.com - Your Illinois News Radar

Bracing for Illinois borrowing backlash as CPS bonds tumble

Posted in:

Illinois

* From the very end of Elizabeth Campbell’s Bloomberg story entitled “Illinois ‘going to be penalized’ in upcoming bond sale”…

“I don’t know that we’ve hit the bottom,” said Richard Ciccarone, Chicago-based CEO of Merritt Research Services. “There’s a lot of things yet to happen.”

Ain’t that the truth.

As we learned under Rod Blagojevich, things can always get worse.

* OK, now scroll back up…

Since it last sold general-obligation bonds in April 2014, the Illinois Supreme Court threw out the state’s effort to cut workers’ benefits to help close a $111 billion pension-fund deficit. Its credit rating has been cut. And temporary tax increases have expired, leaving Republican Gov. Bruce Rauner and Democratic lawmakers locked in a record-long impasse that’s left the state without a budget for more than six months.

The $480 million of federally tax-exempt bonds scheduled for sale Jan. 14 will illustrate the cost of Illinois’ long-building strains, which have caused investors to demand higher premiums to buy its bonds. The state’s 30-year securities yield 4.67 percent, about 1.8 percentage points more than top-rated debt. That gap has risen by more than half a percentage point since April 2014 and is the highest among the 20 states tracked by Bloomberg.

“They’re definitely going to have to pay a higher yield,” said Dan Solender, head of municipals at Lord Abbett & Co. in Jersey City, N.J., which manages $17 billion of the debt, including Illinois bonds. “They’re going to be penalized compared to other bonds of similar ratings.”

We’ll have to wait and see whether the “bond vigilantes” will be as harsh on Illinois as predicted above. It hasn’t really happened in the past. Sales have been heavily over-subscribed.

* And while we’re on this topic, the Illinois Policy Institute’s news service has a story up about the governor’s borrowing plan…

Chris Edwards, an economist with the Cato Institute, says funding road construction and transit projects should be funded by current revenues or cuts in lower priority budget areas because going into debt by selling bonds pushes the costs onto future generations. Edwards says Illinois is the last state that should want to go further into debt because a variety of factors, including having the most unfunded state pension plans.

“That means that in the future Illinois taxpayers will not only have to pay back the money for the bonds they’ll have to probably chip in to pay for this overextended state retirement system.”

Edwards says Illinois’ worst-in-the-country credit rating will also mean selling the bonds will cost taxpayers more because of higher interest rates, however the governor’s office says there was no change in the state’s general obligation bond ratings from the three major ratings agencies. The governor signed a capital bill last summer that gives the state authority to spend bond funds with dedicated revenues to cover the payments.

My own opinion is the state shouldn’t sell a 30-year bond to pay for repairs that will only last 10 years.

Other than that, borrowing for infrastructure is totally legit in my mind.

* And here’s more from Bloomberg’s Campbell…

Chicago Board of Education bonds tumbled to the lowest since September as Illinois Governor Bruce Rauner said he wouldn’t bail out the cash-strapped school system.

The public school system known as CPS has said it needs $480 million from the state to close a budget gap and will face cuts and “unsustainable” borrowing without the funds. Chicago Mayor Rahm Emanuel and CPS Chief Executive Officer Forrest Claypool have called for the help, saying the system receives less state money than other Illinois districts. CPS is the only state district that pays for its teachers pensions. Rauner has said he’ll help out only if Emanuel supports structural changes that he has proposed such as limits on collective bargaining.

“Let’s be clear Chicago Public Schools are in dramatic trouble,” Rauner told reporters on Monday. “They’re looking at a disaster somewhere in the next nine months in the Chicago public schools.”

The Chicago Board of Education’s federally tax-exempt, general obligation bonds traded for an average of 82.45 cents on the dollar on Monday, the lowest since Sept. 28, to yield 6.4 percent, according to data compiled by Bloomberg. The securities, the most-actively traded over the last three months, have a 5 percent coupon and mature in December 2042.

posted by Rich Miller
Wednesday, Jan 6, 16 @ 10:38 am

Comments

–My own opinion is the state shouldn’t sell a 30-year bond to pay for repairs that will only last 10 years.–

Agreed! We should only bond for new projects, not maintenance and they should not be longer than 20 years.

Comment by Ahoy! Wednesday, Jan 6, 16 @ 10:45 am
I agree on the capital term…things like new bridges or buildings which can last for 60-70 years or more are good investments for a 30-year term bond, while doing the same for a road resurfacing that will last 10 years at best are going to put future generations underwater if not balanced out with more durable projects.

Comment by Six Degrees of Separation Wednesday, Jan 6, 16 @ 10:46 am
“They’re looking at a disaster somewhere in the next nine months in the Chicago public schools.”
Is that a prediction or a game plan!

Comment by WhoKnew Wednesday, Jan 6, 16 @ 10:46 am
Chris Edwards, at the CATO Institute, is making an argument that even Alexander Hamilton had to overcome, and did, in order to have a functioning United States government. There’s “Conservative” and there’s antediluvian.

Even theoretical, ideological economists have to deal with reality sometimes.

Comment by walker Wednesday, Jan 6, 16 @ 10:47 am
No matter what anyone wants to believe, the reality is that the fate of Chicago, and the rest of the state are linked.

Comment by AC Wednesday, Jan 6, 16 @ 10:47 am
===Sales have been heavily over-subscribed.===

This is a bad thing — it means that the interest on the bonds is higher than it needed to be.

It’s sort of like being the most popular patron of a strip club. It’s an indication that we’re spending a lot more money than we have to.

Comment by Anon Wednesday, Jan 6, 16 @ 10:49 am
Excellent!

Comment by Mr. Burns Wednesday, Jan 6, 16 @ 10:50 am
The bonds will sell in a New York minute, and there will be a premium, but probably not as much as there will be six months from now as interest rates start to increase.

Still, it’s very weird to go out into the capital markets with such a dysfunctional — willfully so — budget situation.

Prepare for a round of “Is Illinois the next Puerto Rico?” from the mindless biz talking heads. They have to fill up that cable time and get those click-throughs somehow.

Comment by wordslinger Wednesday, Jan 6, 16 @ 10:52 am
walker wins today’s make them go to the dictionary award. Well said.

Comment by Norseman Wednesday, Jan 6, 16 @ 10:53 am
wordslinger- “Still, it’s very weird to go out into the capital markets with such a dysfunctional — willfully so — budget situation.”

Not for the potential buyers of the bonds…. Somebody(ies) are going to benefit at these high interest rates. Hopefully this won’t result in a “Frontline” special investigation in the future.

Comment by Anon221 Wednesday, Jan 6, 16 @ 10:59 am
Long term bonds should be matched to the expected useful life of the project they are being used to finance. That’s whole underlying theory of bonding to pay for projects - you match the costs (bond payments) to the useful life of the project so that taxpayers who benefit from the project are paying for it. (as opposed to paying for a project upfront, which obligates past taxpayers for a future project).

When you use bonds to finance current costs and costs that are less than the life cycle of the bonds, you are obligating future taxpayers for costs that do not benefit them, which is as bad (or worse) than paying for a project up front.

Comment by jerry 101 Wednesday, Jan 6, 16 @ 11:13 am
Nonsense! Take charge Rahm has it covered. He played Fidel and Raoul Castro like Hyman Roth handled Battista. Cuba Libre’ casino dollars will soon pay Chiraq’s bills.

Comment by Snark Wednesday, Jan 6, 16 @ 11:15 am
wordslinger:
I think the term is “chasing yield”.

There’s a huge pile of money out there that needs to return…something. So, that money chases yield. Chasing yield causes systemic risk to grow.

Without growing systemic risk, how ever will we have another global financial crisis?

Comment by jerry 101 Wednesday, Jan 6, 16 @ 11:22 am
Superstar governin’

Comment by Precinct Captain Wednesday, Jan 6, 16 @ 11:30 am
Like the people in Puerto Rico, the people in Illinois are moving and leaving the debt behind!

Comment by Anonymous Wednesday, Jan 6, 16 @ 11:37 am
CTA is doing the same thing: 30 year borrowing to buy buses with a useful life of 12 years. They are about maxed out of further borrowing. Their capital future is grim. But the Mayor doesn’t care.

Comment by Let'sMovetoNorthDakota Wednesday, Jan 6, 16 @ 12:08 pm
Higher yields means more buyers, right?
No one seriously thinks that these bonds will default. Good for the bond purchaser but bad for the taxpayer.

Comment by Jake From Elwood Wednesday, Jan 6, 16 @ 12:12 pm
===“They’re definitely going to have to pay a higher yield,”===

That means higher taxes which Rauner is known to be opposed to.

===My own opinion is the state shouldn’t sell a 30-year bond to pay for repairs that will only last 10 years.===

I fully agree.

===Chicago Mayor Rahm Emanuel and CPS Chief Executive Officer Forrest Claypool have called for the help===

The State of Illinois needs to help CPS by changing the law to exempt the CPS from the property tax cap rules for a few years. Chicago has the lowest property tax rates in Cook County. Another major property tax increase or two is what is needed to solve the problem. The State of Illinois has its own problems with funding of the pension systems and cannot afford to bail out CPS.

Comment by Hit or Miss Wednesday, Jan 6, 16 @ 12:19 pm
How do you “short” Illinois?

http://www.bloombergview.com/articles/2016-01-06/the-big-short-gets-the-financial-crisis-right

Comment by Grayson Wednesday, Jan 6, 16 @ 12:21 pm
What we really need is a legit capital plan with legit revenues. The last one we had was Illinois FIRST. Sadly Illinois has become Illinois LAST.

Comment by Not it Wednesday, Jan 6, 16 @ 12:25 pm
Right now while oil prices are low would be the time to adjust the gas tax upward a dime or two to catch up on bridge and highway repairs. A lot of highway projects are leveraged with federal matching funds. If we don’t proceed on a matching funds project because of lack of state funding, the feds give the money to projects in other states. Also, all highway taxes should be used for transportation related items. Stop diverting the highway money to other programs!

Comment by DuPage Wednesday, Jan 6, 16 @ 2:15 pm
I agree with Hit or Miss on the legislature revoking or a period of time the property tax cap for CPS. More likely is CPS will be placed under an ISBE oversight panel and then it will be Rauner’s problem. It is completely possible Rauner could then have his dream confrontation with the CTU.

Comment by Rod Wednesday, Jan 6, 16 @ 5:46 pm
Actually, Illinois will sell 1 year bonds, 2 year bonds, and so on up to 30 year bonds. And the projects they finance will all last far longer than 1 year or two years and so on. Yep, the cost will be paid in the future (both near and far), just as the use take place in the future (both near and far).

I think the CATO guy doesn’t have any real business folks watching over him, as he suggest at a time of record low interest rates which will shorty start to climb stripping yourself of cash to pay for projects as long as 50-75 years out. Ask your private equity groups about that business model.

Jeez!

Comment by steve schnorf Wednesday, Jan 6, 16 @ 6:19 pm
I couldnt disagree more with hit or miss.

Comment by blue dog dem Wednesday, Jan 6, 16 @ 8:08 pm
Grayson - Wednesday, Jan 6, 16 @ 12:21 pm:

How do you “short” Illinois?

Move - like the thousand are doing monthly.

Comment by cannon649 Wednesday, Jan 6, 16 @ 10:05 pm
It’s not just that we’re selling 30 year bonds to finance repairs that will last 10 years, Rich.

When the 10 year patches fall apart, it will take another 2-5 years (minimum) to repair them.

But when we do get around to fixing them, we’ll sell another set of 30 years bonds to finance another set of 10 year repairs.

The bond attorneys and the bond salesmen will benefit greatly. The road repairs guys will get a medium level of benefit out of the game.

And the taxpaying citizens of the state will get hosed (again).

Who makes the money selling the Vasoline the taxpayers are advised to provide?

Comment by Lynn S. Thursday, Jan 7, 16 @ 12:44 am