GEORGE RYAN AND THE “INABILITY” OF ILLINOIS TO SELL BONDS

1/31/13

The state of Illinois yesterday pulled (The State said “postponed.”) a $500mm bond issue intended to finance a slew of capital projects.   S&P recently downgraded the state to A- from A.  That technically ties Illinois with California for the state with the nation’s lowest bond rating, but since S&P has a “negative” outlook on Illinois and a “positive” outlook on California, our state is, in reality, at the bottom of the heap.  In pulling the deal, the administration of Governor Pat Quinn (no relation) cited that rating downgrade and the unsettling effect the inability of our public servants to address the state’s fiscal maladies has had on the market.  So it looks like the Governor is using the state’s inability to raise money in the public markets as a cudgel to prod the legislature (i.e., Illinois House Speaker Mike Madigan) to do something about our money woes.  Good luck with that, Governor; who do you think got us into this mess?  But I digress.

There are mixed reports on whether the projects that are supposed to be financed by the deal will go forward; the Wall Street Journal said this (Thursday, 1/31/13, page A3) morning that the projects “aren’t expected to be delayed.”  The Chicago Tribune reported on page 8 of today’s paper that whether the projects will go ahead is “unclear.”  Since when did the unavailability of money stop a politician, and especially an Illinois politician, from spending said money?   But, again, I digress.

It’s not so much the State of Illinois’s inability to raise money that “postponed” this deal.  The State can raise the money; it just doesn’t want to pay the interest rates that it would have to pay on the paper.  According to Thomson Reuters, 10 year Illinois bonds yield about 3.2%, about 120 basis points (“bp”s) over 10 year treasuries.  But on an apples to apples, tax adjusted basis, assuming a 35% income tax rate (not the highest rate after the Obama tax increase, but let’s assume, correctly, that not every buyer of Illinois, or municipal in general, paper is in the highest tax bracket), the Illinois paper yields a touch over 4.9%, or nearly 2 ½ times as much as comparable treasury paper.  Astounding.

Further, one suspects, though one can never know, that the only reason that Illinois can sell bonds at those yields, and the only reason that its bonds are not rated junk (BB+, four notches lower than they are now, or below) is because the market, and the ratings agencies, assume that the federal government will not let a state go bankrupt.   Certainly nothing in the finances of the state of Illinois merits more than a junk rating and a yield at least, just to throw out a number, 100 bps (1%) higher than it is now.

So why does the state of Illinois have to pay so much to bribe (a very appropriate verb for out great state, don’t you think?) investors and/or speculators to buy its paper?  

The raw numbers, most saliently, the now $96.8 billion unfunded pension liability and approximately $8.4 billion owed to trade creditors, are bad enough.   But there is something else at work.  Our politicians simply can’t, or won’t, address the state’s fiscal problems, especially its pension problems   Terms like “unfunded liability,” “actuarial assumptions,” and “assumed investment rate” are abstractions to these pols; they will only feel pressure when checks start to bounce or Mike Madigan says “jump.”  Neither is likely to happen in the near term, though the former may be approaching more quickly than most people think.  Why this reluctance to do anything about our pension problems?   The same reason that we got into this problem in the first place:  As I said in my now seminal 1/9/13 piece at the now defunct Rant Political, ILLINOIS PENSION PROBLEMS:   SEND THE CHECK TO MY KIDS,

politicians have learned that, through granting generous pensions to public employees, they can buy today’s votes with tomorrow’s dollars.

Who is going to surrender such a holy grail?   And so while the politicians are nearly inexhaustibly congratulating themselves about doing something regarding immigration reform  (See WOULD THE LAST GUY TO LEAVE ILLINOIS PLEASE TURN OUT THE LIGHTS?, Rant Political, 1/28/13, reproduced below.) and may soon be doing the same about gay rights and maybe even a Chicago casino (See A CHICAGO CASINO:  MORE MONEY FOR THE POLS, MORE PROBLEMS FOR THE TAXPAYERS?, Rant Political, 1/9/13, reproduced below.), they continue to dither about what is clearly the most important and immediate issue:  the looming, if not real, bankruptcy, of the state of Illinois.

Such self-inflicted impotence on the part of our public servants would be bad enough for Illinois’s ability to sell bonds, but there is something else at work:   Illinois’s history and culture, the latter real or perceived, of corruption.   With George Ryan’s having left prison yesterday, only one former Illinois governor is currently living in federally provided housing.   But four of our past eight elected governors have done time, albeit one (Dan Walker) for crimes committed after leaving office.   This is the one area in which Illinois stands head and shoulders above its 49 brethren.  

No one accuses Mr. Quinn (no relation) our current governor, of the types of shenanigans that landed four of his recent predecessors in the hoosegow; his faults lie in the area of competence rather than criminality.  But it is not too much of a stretch to say that, while some people might be surprised, few would be shocked, if virtually any other prominent figure in Chicago/Illinois politics suddenly became the focus of intense federal scrutiny.   This is the legacy left us not only by Rod Blagojevich, George Ryan, Dan Walker, and Otto Kerner, but also by legions of lesser pols throughout the state who have had to become federal guests because of their dastardly deeds.

Further, even leaving aside criminality, the honesty of the whole Illinois political system, and of most of its participants, has to justifiably come into question.   This is a state that repeatedly elects corrupt politicians to high office.   This is a state that nearly revels in its reputation for dirty, dishonest politics, for having the “best politicians money can buy” and where the honesty of a politician is often gauged by his determination to, once bought, stay bought.

Is this the type of state in which you would want to invest?   How much would it take to bribe (again, a very appropriate verb for the Prairie State) you into lending the state of Illinois money?  

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on this subject.

Promised reproduced articles:

WOULD THE LAST GUY TO LEAVE ILLINOIS PLEASE TURN OUT THE LIGHTS?

1/28/13

Illinois Governor Pat Quinn (no relation) signed legislation yesterday allowing illegal immigrants to obtain driver’s licenses in the Land of Lincoln.   The platform on which Mr. Quinn signed this bill into law was crowded with politicians of all ethnicities and of both parties, as if there were two parties in Illinois, but that is grist for another mill.  

Leave aside the merits of the bill, which are, despite the breathlessness of the press coverage, debatable and certainly not self-evident.   What really stunned yours truly about the signing ceremony was that the assorted pols spoke for a combined TWO HOURS in the wake of the signing.   TWO HOURS of being subjected to the bloviations of self-important politicians is enough to make even the most determined, American dream seeking immigrant turn around and head home.  

What is really illustrative about the two hours of self-congratulations, and perhaps about the bill itself, is what it says about the lilliputians we have elected in the Prairie State.   Our state’s major problem is not illegal immigration which, while affecting the lives of many throughout the state, is a federal issue.   Our state’s major problem is that it is growing broke.   Like most states, Illinois is growing broke because the politicians have figured out that, through granting generous, unaffordable benefits to public employees, they can buy today’s votes with tomorrow’s dollars, (See my 1/9/13 post  ILLINOIS PENSION PROBLEMS:   SEND THE CHECK TO MY KIDS.), hence our $95 billion unfunded pension liability.   The politicians on the dais yesterday, breaking their arms patting themselves on the back over passing into a law a bill of questionable importance and efficacy, are the same politicians who have spent the state into oblivion and the same politicians who lack the spine to do anything about the problem they created; again, see my 1/9 post.

Yet these poltroons and popinjays see fit to endlessly and tirelessly congratulate themselves over the licenses for illegals bill…and feel it necessary to take two hours of people’s valuable time to display their manifest wisdom to those on the receiving end of their largesse.   When do they appear before those on the giving end?

A CHICAGO CASINO:  MORE MONEY FOR THE POLS, MORE PROBLEMS FOR THE TAXPAYERS?

1/9/13

While Illinois legislators continue to look for ways to delay action on the pension time bomb that could soon make our state uninhabitable by any rational person, the secondary, and at least tangentially related, issue of a Chicago casino still lurks very close to the surface.  A deal that will bring a casino to the city of Chicago is a virtual lock, now that Governor Pat Quinn (no relation) and Mayor Rahm Emanuel have done the usual chest beating dance designed to show their constituencies that they are tough yet concerned.   And it looks like the ill-fated, perpetually bothersome, and therefore appropriately named Thompson Center, just north of City Hall, might well be the site of the proposed paean to parlous profligacy. 

But one has to ask what benefit a casino would bring to the taxpayers, given Mr. Quinn’s (no relation) insistence, and Mr. Emanuel’s seeming agreement, that 100% of the tax and fee revenue generated by such a casino be earmarked for school construction and modernization.  If all the money goes to construction of new schools and modernization of old ones, nothing, zero, nada, bupkus will go toward solving Illinois’s $95 billion pension problem, Chicago’s proportionally similar pension woes, or paying the state’s unpaid bills.  All we will have accomplished by opening the Loop, or some other city site, to gambling is to give the politicians more money to spend under the diaphanous ruse of “education.”   And it gets worse…not only will the politicians spend the money the casino generates, but they will commit to long term projects based on casino revenue projections that, if history is any guide, will prove too optimistic, leaving such projects to be funded by already exhausted general revenues in the (not too far) out years.   The casino will not solve Illinois’s, or Chicago’s, fiscal problems…it will at best have no impact on them and more probably exacerbate them.

On the other hand, perhaps the politicians in the Land of Lincoln are being clever enough to realize that money is a fungible commodity.  Then they can fund school projects with casino money and use money that would otherwise have been spent on those projects to pay past due bills and fund pensions.  Those with a sense of the history of our once great state remember that was the approach employed when the Illinois lottery was initiated; all the lottery proceeds went to the schools, leaving funds that would have gone to the schools available for pols to spend elsewhere in their endless crusades to remain on the public payroll.   If the same approach is used with casino revenues, and the newly available funds are used not for spending in areas other than school construction but, rather, to fund pensions and to pay bills, a casino would indeed have a salubrious impact on our state’s finances.   But those are too huge “if”s.   Further, such an outcome would require duplicity on the part of our politicians, but that is one of the few “virtues” our state displays in fulsome abundance.