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* Monday press release…
As the state’s chief investment officer, Illinois State Treasurer Michael Frerichs today laid out the steps Gov. Bruce Rauner must take to prevent Illinois from sinking into junk bond status now that a budget package has been approved.
“The credit-rating agencies have indicated that the new revenue and spending cuts alone are not enough to insulate the state against further credit downgrades, including junk bond status,” Frerichs said. “I understand that Gov. Rauner disagrees with the elected members of the House and Senate. However, should he not take these necessary steps, he is inviting the credit-rating agencies to plunge Illinois into junk bond status, the results of which will lead to higher property taxes.”
To avoid becoming the first state in history to be assigned junk bond status, the Governor must:
· Travel to New York, speak directly with the three ratings agencies, and convince them that he embraces the decision of the Legislature and will implement the budget package.
· Immediately take visible, responsible steps to implement the $6 billion in bonding authority, which will yield $3 billion in additional federal dollars to pay down the $15 billion bill backlog.
· Make sure that local schools open on-time. K-12 education funding in the budget package is predicated upon a separate agreement that state dollars will be distributed on an evidence-based model. Lawmakers passed legislation that does so. However, the Governor has promised a veto. Vetoing this agreement, or in the alternative, not striking a different deal, will create more instability, which the rating agencies are expecting Illinois to avoid. It also will threaten local schools from Cairo to Chicago and be a complete disaster for parents.
· Clearly and proactively communicate the new tax rates with Illinois employers to eliminate any confusion. Doing so will ensure that revenue estimates and cash-flow expectations are met.
· Eliminate the divisive rhetoric that is impairing our state from moving forward. This divisiveness counters the civility and bi-partisanship the rating agencies wish to see.
“This mix of revenue and cuts is far from perfect. It is, however, now the law and if implemented it is a critical first step to addressing Illinois’ deep, structural challenges,” Frerichs said. “It is clear that we will not begin to climb out of this debt if the Governor does not take the necessary steps to lead us away from the abyss.”
Earlier this year, Frerichs warned that the inability to reach a budget agreement would invite further credit downgrades that would increase the cost of necessary borrowing. Frerichs also warned of impending junk bond status and, if reached, how that would exasperate the financial markets because some investors are restricted from doing business with entities that have junk bond status. This is true even though entities that purchase Illinois debt have iron-clad constitutional guarantees that they will be paid.
Illinois also uses toxic credit-swap agreements. Junk status invites termination of these agreements. Termination penalties of up to $107 million, in addition to interest rate penalties, could be demanded by the lending agencies.
Illinois has endured eight credit downgrades since Gov. Rauner took office in January 2015. All involved the state’s bill backlog, now estimated to be $15 billion, the budget impasse, and other factors.
The budget package approved by Democrats and Republicans is the first in two years. It was enacted over the Governor’s opposition and plans to spend $36.1 billion in the fiscal year that began July 1, 2017. Currently, the state spends $39 billion annually, so the package represents a $3 billion spending cut. The cuts, combined with new revenue and federal matching dollars, could allow for up to $8 billion of the bill backlog to be addressed.
However, it will take several years, including the likelihood of several more challenging budget packages, for Illinois to eliminate the bill backlog and return to a more acceptable payment cycle of 30-90 days.
* The governor’s office responded via the Sun-Times…
“The low rating from the rating agencies is reflective of the fact that Madigan’s 32 percent permanent tax increase will not solve the problems created by decades of unbalanced budgets, unfunded pension liabilities, borrowing and high debt,” Eleni Demertzis said.
“Even with the tax increase, this budget remains $2 billion out of balance for fiscal year 2018. The best thing we can do is to work collaboratively to pass truly balanced budgets that pay down our debt, reform our pension system, and make the changes necessary to drive economic growth in our state.”
posted by Rich Miller
Tuesday, Jul 11, 17 @ 10:15 am
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Travel to New York and tell the bond houses you are resigning your hobby as Governor and that you hope your successor actually cares about a functioning government.
Comment by Better Approach Tuesday, Jul 11, 17 @ 10:22 am
“…The best thing we can do is to work collaboratively to pass truly balanced budgets that pay down our debt, reform our pension system, and make the changes necessary to drive economic growth in our state.”
That would be the best thing, except what reform of the pensions is there? None. And “working collaboratively”–is that a new meme waiting to be born?
Comment by Anonymous Tuesday, Jul 11, 17 @ 10:22 am
Anonymous at 10:22 was me.
Comment by My New Handle Tuesday, Jul 11, 17 @ 10:23 am
Has Rauner or his staff made any efforts to stave off a downgrade? The taxpayers really deserve to know the answer to this question.
Comment by not again Tuesday, Jul 11, 17 @ 10:25 am
Frerichs hardly has Rauner’s best interests at heart, and this was probably, in fact, an effort to pre-spin any further downgrades. But that’s pretty smart politics, and it’s not like his ideas are bad…
Comment by Arsenal Tuesday, Jul 11, 17 @ 10:27 am
How is tanking the state a route to driving economic growth? What pension reform? Tier 2, Tier 3? Doesn’t count?
This man’s idea of pension reform is eliminating any and all forms of public retirement plans. Let them work for minimum wage, no benefits. A privilege to serve.
Live under a bridge when you’re 70
Comment by AnonymousOne Tuesday, Jul 11, 17 @ 10:34 am
Trying to sell Illinois to others is not what Rauner does. Crimps his political narrative. Working to avoid junk status is governing. A concept totally foreign to Rauner.
Comment by Norseman Tuesday, Jul 11, 17 @ 10:37 am
So, is Rauner saying he shouldn’t issue the bonds to start paying down the bill backlog? Is that really the stance he is taking? He knows he can do that and still fight for hiss other “reforms”, right? They aren’t mutually exclusive.
Comment by Montrose Tuesday, Jul 11, 17 @ 10:38 am
What’s in the best interest of the State?
Comment by anon2 Tuesday, Jul 11, 17 @ 10:39 am
That’s not surprising at all is it?
Comment by Valvino Tuesday, Jul 11, 17 @ 10:41 am
“I’ll go the New York, but only if they have a pizza party,” Fake Rauner.
https://tinyurl.com/y9n7374a
Comment by Anon221 Tuesday, Jul 11, 17 @ 10:50 am
=== What’s in the best interest of the State? ===
I can tell you what’s not in the best interest of the state. Not doing everything you can to try and avoid another rating downgrade that will cost taxpayers a ton of money.
Comment by Norseman Tuesday, Jul 11, 17 @ 10:50 am
Not enough Rs flipped to get his attention… it is still “Madigan” to him.
I don’t know anything about bonds and ratings, but even I know that “junk” status isn’t good for anyone except rich investors who know how to game it to their advantage…
Comment by downstate commissioner Tuesday, Jul 11, 17 @ 10:51 am
When asked why he didn’t actually govern when he had the chance, all ex-Governor Rauner could mutter was: “Madigan…”
Comment by Blue Bayou Tuesday, Jul 11, 17 @ 10:54 am
Could Gov. Businessman offer his economic and fiscal reasons for continuing to stiff vendors and stick taxpayers with the extra juice of the late payment act, rather than bond out a portion of the backlog at a lower rate and pump that money into the economy?
That has to be some serious razzle-dazzle arithmetic he’s cipherin’. Because it’s borrowing, either way.
If he can’t, I’ll assume he’s just being petulant and punishing taxpayers and those who have provided goods and services in good faith. Because he can.
Comment by wordslinger Tuesday, Jul 11, 17 @ 10:54 am
“The best thing we can do is to work collaboratively to pass truly balanced budgets that pay down our debt, reform our pension system, and make the changes necessary to drive economic growth in our state.” The opportunity is always there for the Governor to put all of that detail in writting and show his work, not just simply talk or say ‘No’.
Comment by zatoichi Tuesday, Jul 11, 17 @ 10:54 am
The Guv wants junk status soon. Since it would be on the heels of the budget, he will blame junk status on MJM. “Had they passed my budget and reforms, we wouldn’t have been downgraded to junk . . .”
But I am sure the Guv will say to anyone who will ask him that he is doing “everything possible” to ensure we don’t get downgraded. (It worked so well on the overrides)
Comment by Henry Francis Tuesday, Jul 11, 17 @ 10:59 am
===Illinois also uses toxic credit-swap agreements. Junk status invites termination of these agreements. Termination penalties of up to $107 million, in addition to interest rate penalties, could be demanded by the lending agencies.===
I think Rauner rates issues such as lawsuit reform, local employee empowerment zones, and the ability of local units of government to exclude some topics like wages and insurance from collective bargaining much more importance.
Comment by Illinois Native Tuesday, Jul 11, 17 @ 11:02 am
He’s not so great at the taking advice thing.
Comment by P. Tuesday, Jul 11, 17 @ 11:03 am
You guys are is such serious trouble… going to NY, implementing the plan… fine but it will not work. I don’t live in the state, but I would not invest in Illinois bonds regardless of status… they may not be junk officially today, but they are junk and risk of default is significant. Quit fighting with each other and make the hard decisions that will grow your economy… not shrink it. Given this latest kick the can plan, Any business interested in survival should leave, if you are young and work for the government, get out before your too old to start fresh. Sell your house while there is still demand, and family member planning on talking the Illinois bar, consider adding another state or two to the list. Sorry guys, but we left NJ when they started going crazy with taxes… have never regretted it….
Comment by JJ Tuesday, Jul 11, 17 @ 11:17 am
Mike is so jealous of all the ink Mendoza has been getting that he’s been working OT to try to figure out how to get some attn. for himself.
Comment by jim Tuesday, Jul 11, 17 @ 12:44 pm
Those two public statements displayed a stark contrast in professionalism. Can’t we at least get a thoughtful response out of someone in Rauner’s office who actually understands financial markets?
Comment by walker Tuesday, Jul 11, 17 @ 1:19 pm
So the governor won’t do what needs to be done to head off “junk” status so he can attempt to blame it on his Great White Whale?
Got it.
Comment by Stumpy's bunker Tuesday, Jul 11, 17 @ 1:45 pm
JJ - I didn’t realize “The Road” was set in the near future in Illinois. That clears everything up.
Comment by Montrose Tuesday, Jul 11, 17 @ 3:30 pm
Rating agencys are the arch enemy of venture capitalist
Comment by Rabid Tuesday, Jul 11, 17 @ 4:20 pm
At the start of this year Moody’s paid a $864 million settlement to the DOJ and many states to absolve themselves of legal responsibility for rating mortgage backed derivatives too high before the mortgage meltdown. S&P paid $1.35 Billion. Anyone who believes either of these agencies is going to go through that again to rate Illinois G. O. bonds higher than the junk they are is going to be disappointed.
Comment by GeorgeoftheJungle Tuesday, Jul 11, 17 @ 5:31 pm
== That would be the best thing, except what reform of the pensions is there? ==
Tier 2 was reform that basically made the employees fully fund he pensions with no employer contribution. The new Tier 3 is reform … but by doing any match it will cost the taxpayers more in the long run.
Tier 1 you can’t “reform”. You can’t negate it, you can’t wish it away; you have to pay it. If you don’t like it, take it up with the only 7 votes that matter: the IL SC.
Comment by RNUG Tuesday, Jul 11, 17 @ 7:24 pm
rookie govenor-elects expired tax was a failure, mike reinstated a rookie mistake, tax cuts did not grow the economy
Comment by Rabid Wednesday, Jul 12, 17 @ 2:40 am
Dear Mike,
How’s being treasurer goin for ya? Your request that I actually root for Illinois was a good one. You must not know what my schtick is yet. Hint: It has nothin’ to do with being a cheerleader for this failed state until I’m done destroying the gubmint. Silly boy.
Comment by PublicServant Wednesday, Jul 12, 17 @ 6:55 am