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* S&P Global Ratings…
Enactment of a fiscal 2018 budget in Illinois did not bring an end to the ongoing political stalemate that caused its two-year budget impasse. The governor and General Assembly remain at odds over funding policy for the state’s school districts. It is also uncertain, in S&P Global Ratings’ view, whether the governor will proceed to implement a budget provision authorizing the state to refinance a portion of its accumulated budgetary debt with general obligation (GO) bonds. Reducing the backlog of unpaid bills with lower-interest-cost GO debt would restore some of the state’s capacity to engage in extraordinary forms of cash management.
In our view, Illinois’ growing reliance on delaying payments was a sign of its intensifying fiscal stress. Its ability to do so, however, served a crucial reserve-like function during its protracted fiscal crisis. We don’t take a position on any of the state’s specific debt or fiscal policy proposals. But given that its budget reserve remains depleted, we believe that foregoing the opportunity to replenish some of this implicit cash flow borrowing capacity would leave the state’s liquidity profile subject to heightened vulnerability. The Illinois General Assembly recently approved a permanent increase in the state’s individual and corporate income tax rates, which should help bring its budget closer to balance. Throughout its unprecedented two-year budget standoff, however, Illinois’ revenue base was structurally inadequate to support its authorized and legally required payment obligations. In response, the state comptroller prioritized paying the state’s core commitments over those she deemed to be lower-priority claims. In our view, the state’s practice of delaying payment on some of its obligations represents an exercise of its sovereign authority and is a tool that enabled it to sustain the funding of essential services. In the context of the state’s budget crisis, the payment deferrals insulated Illinois’ ability to cash-fund in a timely manner what the comptroller determined are the state’s core obligations, including debt service. But given its widening structural deficit in fiscal years 2016 and 2017, the bill backlog soared to record levels and by the end of fiscal 2017 was approaching $15 billion.
We believe there is a threshold beyond which the state’s ability to triage its cash and various payment obligations in favor of its chosen priorities can become impaired. Given its status as a sovereign, the precise boundary of this limitation for Illinois is unspecified. However, a recent federal court ruling circumscribed the state’s leeway to continue delaying payments to its Medicaid managed care organizations (MCOs). The ruling found that the state was not compliant with prior consent decrees pertaining to the timeliness of payments to the MCOs. We viewed this as a sign that Illinois was rapidly approaching the point at which even its emergency cash management measures would become exhausted. Because of the court’s ruling, beginning in July the state was required to increase payments to the MCOs by $290 million per month (net of federal matching subsidies). But in negotiations, the state comptroller had offered to increase payments by a much lower amount–$75 million (which, with federal matching funds, could generate up to $150 million in funding). This indicated to us that the state’s cash flows were becoming inadquate to fund its range of priority payments. Therefore, absent the ability to access other state funds which was provided with the enactment of the budget, the court’s ruling mandating stepped-up Medicaid payments threatened to precipitate a liquidity crunch for the state.
In recent years, the balance on Illinois unpaid bills has increased roughly in parallel with the state’s annual fiscal deficits. Consequently, issuing bonds to retire some of the bills might be viewed as tantamount to a deficit financing. And while bonding for current or past operating expenses typically is not a best practice, we believe it is encompassed in the state’s ‘BBB-’ GO debt rating. Furthermore, the unpaid bills themselves are debts of the state. Thus, replacing the unpaid bills with bonds does not represent a net increase in its overall liabilities, though it would increase the state’s annual (fixed) debt service costs. Issuing the bonds would also cause the state’s various debt ratios we consider under our rating methodology to increase. However, key metrics would remain, as they are now, in the ‘moderately high’ range as defined in our criteria (see table below).
As enacted, the General Assembly’s budget legislation authorized up to $6 billion in GO bonds for refinancing the bills. However, as described by the legislative sponsors in the House of Representatives, the budget plan estimated an operating surplus of $360 million, enough to support debt service on approximately $3 billion in GO bonds with a 12-year maturity. Even this may overstate the state’s ability to pay debt service from a budgetary surplus if certain budget assumptions don’t hold. Furthermore, unlike the bill backlog, over which the state retains some flexibility with regard to the timing of repayment, debt service on the bonds would be a new hard cost. But it’s likely that the bonds could be sold at a lower interest cost than what it pays on much of its bill backlog (up to 12%). Therefore, the state may realize net fiscal savings which we believe Illinois can ill-afford to pass up given its weakened financial position, even if the additional debt service adds incrementally to its operating deficit.
At its current rating level, we believe unanticipated liquidity stress remains one of the leading risks to Illinois’ credit quality. Without a budget reserve, the range of fiscal tools available to Illinois with which to navigate a stress scenario is narrower than it is for other states. Throughout its budget impasse, accumulating payables—in effect, shifting the burden of managing a cash flow deficit to its payees—became the state’s de facto approach to liquidity management. However, with nearly $15 billion in unpaid bills as of early July, its ability to continue relying on payment delays was approaching legal and practical limits. The federal court ruling reducing the extent to which the state can delay payments to its Medicaid MCOs illustrated this fact. Retiring a portion of the unpaid bills with proceeds from a GO bond issue implies that in the event of renewed liquidity stress, the state would have restored a portion of its deferral capacity. On its own, implementing the bonding strategy is unlikely to improve the state’s credit quality. However, refinancing a portion of the state’s high interest bill backlog could offer a modest layer of potential cushion to its liquidity. Therefore, the refinancing plan may, to a limited degree, protect Illinois’ credit quality to the downside.
*** UPDATE *** Pritzker campaign…
According to a new report by S&P Global Ratings, Bruce Rauner’s refusal to refinance state debt is forcing Illinois taxpayers to pay the price and bringing “heightened vulnerability” to the state’s finances. Taxpayers are on the hook for $2 million a day in interest alone on unpaid bills.
S&P says by taking the commonsense step to pay state vendors with bonds, “the state may realize net fiscal savings which we believe Illinois can ill-afford to pass up given its weakened financial position.” The bill backlog is close to $15 billion, nearly triple what it was in June 2015.
“Bruce Rauner’s damage is done after putting our state through a 736-day budget crisis and tripling our bill backlog, so it should come as no surprise that he would skip an opportunity to bring our state out of financial ruin,” said Pritzker campaign spokeswoman Jordan Abudayyeh. “This is a fiscal mess of Rauner’s own creating, and one he is either unwilling or unable to solve.”
posted by Rich Miller
Tuesday, Aug 22, 17 @ 12:45 pm
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===The federal court ruling reducing the extent to which the state can delay payments to its Medicaid MCOs illustrated this fact. Retiring a portion of the unpaid bills with proceeds from a GO bond issue implies that in the event of renewed liquidity stress, the state would have restored a portion of its deferral capacity. On its own, implementing the bonding strategy is unlikely to improve the state’s credit quality. However, refinancing a portion of the state’s high interest bill backlog could offer a modest layer of potential cushion to its liquidity.===
The Rauner Administration has but 3 courses of action here, and those courses are based on the grab I took above…
1) Accept the path from the grab above and build a campaign around being (oh boy) fiscally smart with state money and reducing obligations and allowing monies available to allow Illinois to function.
2) Try to be creative (for lack of a better term or honesty) and have the end game be framed by that grab, but a victory under Rauner’s own terms.
3) Make the honest, mathematical and fiscal, case that the grab I have is a fool’s errand, and show, unequivocally why that the course of action above is not the action necessary, and actually have the charts, numbers, figures, that a “successful businessman” would make such a decision over a prudent course of action.
That’s it.
These are the 3 Rauner and Raunerite choices.
I’d chose the first choice, but I’d like Illinois to see some fiscal avenue, no matter who gets the credit.
That’s me, using Radical Candor.
Comment by Oswego Willy Tuesday, Aug 22, 17 @ 12:55 pm
Stating the obvious: refinance your debt at a lower rate to save money.
Rauner just pretends he doesn’t get it. His real objection, as pointed out by RNUG, is that once you bond the debt, you have to pay it. You lose the ability to squeeze the beast and be a deliberate deadbeat.
Comment by wordslinger Tuesday, Aug 22, 17 @ 12:58 pm
Does the Governor have a good reason for refusing to refinance State debt at a lower interest rate?
Comment by anon2 Tuesday, Aug 22, 17 @ 1:02 pm
== Does the Governor have a good reason for refusing to refinance State debt at a lower interest rate? ==
Note the comment about it becoming hard debt that must be paid.
Even though he lost control of the Comptroller, I suspect Rauner wants to keep as much cash free / uncommitted as he can. Partly because it was his operating method as a corporate bust-out artist, partly to make sure his pinstripe patronage consulting contracts get paid,you and partly because he still has hopes to regain the Comptroller’s Office.
Comment by RNUG Tuesday, Aug 22, 17 @ 1:13 pm
anon 2 even the S and P statement does not guarantee that the refinancing would be at a lower interest rate. S and P says “But it’s likely that the bonds could be sold at a lower interest cost than what it pays on much of its bill backlog (up to 12%).”
Its hard to imagine there would not be a savings, but the truth is there in no guarantee of that.
Comment by Rod Tuesday, Aug 22, 17 @ 1:17 pm
===Even though he lost control of the Comptroller, I suspect Rauner wants to keep as much cash free / uncommitted as he can. Partly because it was his operating method as a corporate bust-out artist, partly to make sure his pinstripe patronage consulting contracts get paid,you and partly because he still has hopes to regain the Comptroller’s Office.===
- RNUG -, you and - wordslinger - have really drilled down to what “squeeze the beast” has meant, in all forms, including all avenues, and the “windfalls” like IT contracts and pinstripe patronage getting priority over fiscal soundness.
My hope now is that with a budget passed (less K-12), the political weight of the real numbers that require a refinance will win the day.
I have hope, but the hope is but my own hope, not based on historic precedent.
Comment by Oswego Willy Tuesday, Aug 22, 17 @ 1:19 pm
Why would Rauner want to refinance at a lower interest rate when that is contrary to his goal of bankrupting the state to bust Unions?
This is also why he opposed a budget and tax hike override.
Comment by Real Tuesday, Aug 22, 17 @ 1:27 pm
I also believe that Rauner wants cash on hand to prosecute his Great Labor War. Oh what you forgot about that? Yep, think it’s on hold till The right moment. He fought so hard to get the appeal to the 4th district appellate court. I also don’t believe the “likely to prevail” language in the stay of contract implementation. AFSCME is taking nothing for granted and planning for the worst scenario. Also he has Janus v AFSCME to look forward too. We’re feverishly preparing for that as well.
Labor War is looming
We haven’t forgotten.
Comment by Honeybear Tuesday, Aug 22, 17 @ 1:32 pm
Does it really take more than 1,000 words to make the obvious point that refinancing $6 billion in unpaid bills at high interest rates to GO bonds with a much lower interest rate is a good idea?
S&P should explicitly indicate that the Governor’s unwillingness to take advantage of the obvious interest savings increases the probability of another ratings downgrade for the state.
Comment by PragmaticR Tuesday, Aug 22, 17 @ 1:47 pm
S&P seems to assume Rauner has the best interests of the state at heart.
Comment by Nick Name Tuesday, Aug 22, 17 @ 1:50 pm
“…partly because he still has hopes to regain the Comptroller’s Office.”
Has he named a candidate yet?
Comment by Nick Name Tuesday, Aug 22, 17 @ 1:51 pm
TL;DR : “Governor, dude, what are you doing? Refinance already!”
Comment by Perrid Tuesday, Aug 22, 17 @ 2:09 pm
TL;DR : “Governor, dude, what are you doing? Refinance already!”
Im not sure he can…from the S&P analysis:
–Even this may overstate the state’s ability to pay debt service from a budgetary surplus if certain budget assumptions don’t hold.–
Comment by ughhh Tuesday, Aug 22, 17 @ 3:42 pm
Pritzker’s message is way too complex. Attacking this Rauner position is simple, and can really resonate:
Illinois pays x% interest on its bills. Gov. Rauner could
refinance those bills at just y%, saving the state $gazillion, but he refuses. That’s right, we’re paying $gazillion in extra Interest each year to Gov. Rauner’s billionaire buddies.
You’d refinance your house to save money. But Bruce Rauner won’t do that for us.
Comment by Keyrock Tuesday, Aug 22, 17 @ 4:06 pm
S&P doesn’t go far enough. The fiscally sound move is to bond out ALL of the operating debt–100% of it. At the same time enact a revenue source over and above what was just enacted to pay off the bonds. THAT will get Wall Street’s attention in a very positive way!
Comment by formerpro Tuesday, Aug 22, 17 @ 4:07 pm
Harrumph. This is just some busybody ratings agency’s opinion of what sound fiscal policy should look like in the hands of a government run by someone with business experience.
/s
Comment by 37B Tuesday, Aug 22, 17 @ 4:08 pm
ughhh that is exactly why S and P can’t really guarantee that refinancing will be at a lower interest rate. It is hard to believe floating GO bonds would not save money, but given the full faith and credit of Illinois may have little meaning I guess it is a possible consideration for investors.
Comment by Rod Tuesday, Aug 22, 17 @ 4:09 pm
In June of 2017, 10 year IL bonds had a yield of 4.4%. It is clear that the state could issue at least $1 billion dollars at a yield around 5%. The interest saving from the first year alone is double the interest payments on the new debt. There may be an mechanical appropriation issue but the economics are clear.
Comment by PhD Tuesday, Aug 22, 17 @ 6:47 pm
What new revenue source? Legalized pot?
Comment by Ron Wednesday, Aug 23, 17 @ 5:25 am
==What new revenue source?==
Tax retirement income with an exemption of the first 30K to protect poor retirees. Shared sacrifice.
Comment by PhD Wednesday, Aug 23, 17 @ 6:52 am
Regarding retirement income, Dave Harris has had legislation that taxes people receiving retirement benefits under 65 if they make $80k a year, and anyone over 65 if they make $100k a year, which he claims would generate a billion dollars a year, which is much more generous that what PhD suggested, and it was shot down. There’s just no point in having the conversation, it is an emotional third rail for people.
Comment by Perrid Wednesday, Aug 23, 17 @ 8:16 am
If we just had term limits, lower wages for the construction trades, lower workers compensation for work place injuries and an independent map we could pay that backlog of debt.
I guess if we had the governors agenda passed a money tree would sprout on the capitol lawn, where the unicorns graze, and all your troubles would be over.
Comment by Publius Wednesday, Aug 23, 17 @ 8:44 am
==There’s just no point in having the conversation, it is an emotional third rail for people.==
The goal of tax reform is to increase the tax base, lower the tax rate, and increase total revenue. So, tax retirement income like other income, lower the tax rate to 4.75%, and have an retirement income exemption of $50K. The federal government taxes retirement income for this very reason. Why should wealthy retirees avoid shared sacrifice?
Comment by PhD Wednesday, Aug 23, 17 @ 9:16 am