I put the the over/under until Illinois officially goes bankrupt at 7.5 years. What you got?
Junk by Any Name in Illinois
Politicians and credit raters form a coalition for tax and spend.
Illinois Gov. Bruce Rauner speaks at a news conference in Chicago, July 5. PHOTO:ASSOCIATED PRESS
July 5, 2017 7:36 p.m. ET
119 COMMENTS
Credit-rating agencies are now backing off their threat to downgrade Illinois debt to junk status after the state’s Democratic Senate with GOP support overrode Governor Bruce Rauner’s veto of a tax increase this weekend. But bondholders beware: Politicians will happily throw them over as easily as Republicans dumped their reform principles.
The three major rating agencies— Moody’s , S&P and Fitch—are constructive in highlighting fiscal deficits, but they often underestimate credit risk. Downgrades are lagging indicators of fiscal and economic stress. Puerto Rico’s debt wasn’t slashed to junk until 2014—seven years into a decade-long recession and after politicians had borrowed tens of billions to tape up structural deficits. And as they demonstrated again in Illinois, credit raters don’t much care how deficits are closed. Tax increases are fine, even desirable, if spending cuts are too politically difficult.
Earlier this year the big three credit raters cut Illinois’s rating to just above junk and warned the state would lose its investment grade if politicians didn’t pass a budget reducing its $15 billion backlog of bills. While the yield on Illinois’s 10-year general obligation bonds is 4.4%, servicing its debt is twice as expensive as for highly rated governments—and watch out if interest rates rise.
Democratic leaders used the junk threat to turn up the heat on Mr. Rauner, who proposed a compromise of temporary income and corporate tax increases in return for a few modest economic and government reforms. But Democratic legislators and public unions pocketed the taxes without the reform.
They figure they can get whatever they want from the next Democratic governor as they did with Mr. Rauner’s predecessor Pat Quinn. Chicago business groups backed Democrats in the budget fight, hoping a state tax hike would bring more revenues into the city and keep local politicians from targeting downtown businesses. Good luck with that.
Rating agencies in effect gave downstate Republicans political cover to back the tax increase. After the House passed a budget over the holiday weekend raising $5 billion in taxes, Fitch praised the state’s “concrete progress.” S&P noted that the budget could “help put a halt to this erosion of the state’s sovereignty over its fiscal affairs.”
But while higher taxes may let bondholders breathe easier for a while, they won’t change the state’s tax-borrow-and-spend culture. To pay its backlog of health-care bills—which are accruing interest at a 9% rate—the state now plans to issue $6 billion in general obligation bonds. Illinois has borrowed $17 billion to fund pensions, which remain unfunded by $130 billion. The state this year will pay $1.6 billion in interest on the bonds and $8.9 billion to the pension funds—equal to about 35% of the state general fund.
After jacking up property taxes, Chicago Public Schools last month borrowed $400 million at roughly 6.4% to make mandated pension payments. The short-term loans are backed by state aid. As one alderman said, “you’re still robbing Peter to pay Paul and putting a Band-Aid on it.”
Rating agencies were loath to scold Puerto Rico, Detroit and Stockton, California, when they raised taxes while deferring spending reforms. But the tax increases propelled their economic decline and population flight, and bondholders ultimately got fleeced. Illinois may not be able to go bankrupt under federal law, but that won’t stop politicians from making them an offer they can’t refuse.
Oh, and please don’t come whining about “the sanctity of contracts” when the politicians start the fleecing. It’s hard to tell who are less believable: Illinois politicians or the credit raters who judge their paper.
Appeared in the July 6, 2017, print edition.
Junk by Any Name in Illinois
Politicians and credit raters form a coalition for tax and spend.
Illinois Gov. Bruce Rauner speaks at a news conference in Chicago, July 5. PHOTO:ASSOCIATED PRESS
July 5, 2017 7:36 p.m. ET
119 COMMENTS
Credit-rating agencies are now backing off their threat to downgrade Illinois debt to junk status after the state’s Democratic Senate with GOP support overrode Governor Bruce Rauner’s veto of a tax increase this weekend. But bondholders beware: Politicians will happily throw them over as easily as Republicans dumped their reform principles.
The three major rating agencies— Moody’s , S&P and Fitch—are constructive in highlighting fiscal deficits, but they often underestimate credit risk. Downgrades are lagging indicators of fiscal and economic stress. Puerto Rico’s debt wasn’t slashed to junk until 2014—seven years into a decade-long recession and after politicians had borrowed tens of billions to tape up structural deficits. And as they demonstrated again in Illinois, credit raters don’t much care how deficits are closed. Tax increases are fine, even desirable, if spending cuts are too politically difficult.
Earlier this year the big three credit raters cut Illinois’s rating to just above junk and warned the state would lose its investment grade if politicians didn’t pass a budget reducing its $15 billion backlog of bills. While the yield on Illinois’s 10-year general obligation bonds is 4.4%, servicing its debt is twice as expensive as for highly rated governments—and watch out if interest rates rise.
Democratic leaders used the junk threat to turn up the heat on Mr. Rauner, who proposed a compromise of temporary income and corporate tax increases in return for a few modest economic and government reforms. But Democratic legislators and public unions pocketed the taxes without the reform.
They figure they can get whatever they want from the next Democratic governor as they did with Mr. Rauner’s predecessor Pat Quinn. Chicago business groups backed Democrats in the budget fight, hoping a state tax hike would bring more revenues into the city and keep local politicians from targeting downtown businesses. Good luck with that.
Rating agencies in effect gave downstate Republicans political cover to back the tax increase. After the House passed a budget over the holiday weekend raising $5 billion in taxes, Fitch praised the state’s “concrete progress.” S&P noted that the budget could “help put a halt to this erosion of the state’s sovereignty over its fiscal affairs.”
But while higher taxes may let bondholders breathe easier for a while, they won’t change the state’s tax-borrow-and-spend culture. To pay its backlog of health-care bills—which are accruing interest at a 9% rate—the state now plans to issue $6 billion in general obligation bonds. Illinois has borrowed $17 billion to fund pensions, which remain unfunded by $130 billion. The state this year will pay $1.6 billion in interest on the bonds and $8.9 billion to the pension funds—equal to about 35% of the state general fund.
After jacking up property taxes, Chicago Public Schools last month borrowed $400 million at roughly 6.4% to make mandated pension payments. The short-term loans are backed by state aid. As one alderman said, “you’re still robbing Peter to pay Paul and putting a Band-Aid on it.”
Rating agencies were loath to scold Puerto Rico, Detroit and Stockton, California, when they raised taxes while deferring spending reforms. But the tax increases propelled their economic decline and population flight, and bondholders ultimately got fleeced. Illinois may not be able to go bankrupt under federal law, but that won’t stop politicians from making them an offer they can’t refuse.
Oh, and please don’t come whining about “the sanctity of contracts” when the politicians start the fleecing. It’s hard to tell who are less believable: Illinois politicians or the credit raters who judge their paper.
Appeared in the July 6, 2017, print edition.
