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UPDATE 9/12/19: The News-Gazette has now published it’s own firm response to the Comptroller’s office, linked here.

By: Mark Glennon*

Illinois Comptroller Susana Mendoza released the state’s “CAFR” — the annual, audited financial report — together with her press release, on August 29. The press release is headlined “Illinois cuts its deficit in half in fiscal year 2018, annual CAFR shows. We criticized that press release harshly in our article here, Illinois Hit By Record $47 Billion Loss, Ignored by Regular Media. Why?

The News-Gazette then wrote an article similar to our criticism, headlined “Sharing just portion of state’s finance numbers is fully misleading,” quoting us and other sources.

Now Mendoza’s press director, Abdon Pallasch, has sent a Letter to the News-Gazette’s Editor criticizing their article and ours, saying they had bought “hook, line and sinker” the apocalyptic rantings of a fringe website – Wirepoints.

This is our response to Pallasch and Mendoza.

For your reference, the News-Gazette’s article and Pallasch’s letter are reproduced below.

*******************

Pallasch’s letter simply ignores the main charge both we and the News-Gazette made, which is that Mendoza relied only on misleading numbers from the “general funds” to claim a major deficit reduction. The general funds are only part of the picture, and they effectively count borrowed money as if it is income. We explained that in detail in our initial article. It’s like claiming you cut your losses in half by putting that half on a credit card.

Mendoza’s press release buried the true, whole picture, which shows the state’s reported loss was actually an astonishing $47 billion. Perhaps a few readers so inclined could calculate something close to that if you did some math based on other numbers buried in the press release, but nobody realistically can be expected to do that.

The other central point of our article was the state’s massive $55 billion obligation for state retiree healthcare (“OPEBS”).  That’s a stunningly large addition to Illinois’ debt load that the state and most news reports have historically ignored, now corrected by a new accounting rule. Pallasch’s letter says “that was all in our news release and extensively detailed in the CAFR.”

No. The press release barely mentions it, and says nothing to call attention to the difference from what Illinois was told in earlier reports. And Mendoza totally ignored the long term horror story about which the CAFR is part — $178 billion lost since 2002.

Pallasch and Mendoza knew exactly what they were doing. Well, initially, at least. They cherry-picked an element from the CAFR that distorts the state’s financial health. They wrote a press release in which only the headline and the first paragraph would be intelligible to most reporters, knowing that most reporters could not assess the CAFR on their own. As you would expect, many news stories across the state centered only on those, regurgitating the press release with headlines like “Illinois cuts deficit in half in fiscal year 2018.”

Pallasch’s letter says the News-Gazette reporter should have called him for comment. “We might have been able to save him from getting his facts wrong and misleading News-Gazette readers,” he says.

Well, I did call Pallasch for comment before I wrote. It was a waste of time. I asked specifically why he cited the unrepresentative “general funds” accounting that counts borrowed money as income to claim that the deficit was cut in half. He gave no answer. “It’s all in the CAFR” that was published, he said, adding that they selected the parts they did, focused on the general fund, and that those wishing to write about other aspects can look at the other sections.

Pallasch repeats part of that in his new letter, saying he “invited everyone to explore all the
numbers in the CAFR.”

Come on now. He knows full well that 99% of the public and most media don’t have the background to decipher a CAFR. For proof of that, consider one who tried. They failed. Capital News Illinois is a quality operation that I’ve yet to see make a mistake. But when they tried to go beyond the press release they got the CAFR numbers entirely reversed, writing that the state’s position improved to negative $136 billion from negative $184 billion. They reversed 2017 and 2018.

Comptroller Susana Mendoza

Pallasch also didn’t like our take on Mendoza’s motives for spinning the CAFR as she did. We think it’s part of her endless messaging campaign blaming the budget impasse and Governor Rauner’s failures for pretty much everything bad in Illinois.

Yeah, I guess we were speculating about that being her motive. Maybe that’s because she repeats that claim so often it’s become a joke on Twitter. Heck, just last week she wrote about social safety nets and couldn’t make it past the first sentence without doing it again.

Finally, Pallasch calls Wirepoints “fringe” and our viewpoint “apocalyptic.” That indicates more about the perspective of Illinois’ political establishment than it says about us. Our research and commentary have been cited approvingly in the New York Times, Barron’s, Forbes, Washington Post, The Bond Buyer and many others. We reach hundreds of thousands of readers per month, concentrated in the financial community, and we’ve had over a million page views on a single article.

Pallasch and Mendoza must think the nation’s leading financial paper, The Wall Street Journal, is likewise fringe, since they’ve been as apocalyptic as us, writing recently about Illinois’ “inevitable financial collapse.” They cite our research often.

I said Mendoza’s politically spun press release worked as intended with most of the press – initially. But our article on this has now been viewed over 50,000 times and counting, and we haven’t received a single comment quarreling with our analysis. Pallasch’s letter should make it good for tens of thousands more.

Here’s what this is really about. We are fed up with Illinois politicians covering up accruing debts that surge every day. It’s those accruals that have bankrupted Illinois and many of its municipalities. Politicians hide those losses behind bogus, cash-based budget accounting and meaningless parts of financial statements that count borrowed money as income and ignore accruals, which is what Mendoza did.  As a reminder, here’s our chart showing it:

If you try to hide those accruing debts, we will go after you.

*Mark Glennon is founder of Wirepoints.

************

News-Gazette article from September 10: Sharing just portion of state’s finance numbers is fully misleading

How does one keep the natives — aka Illinois taxpayers — from getting restless?

Don’t tell them the truth, the whole truth and nothing but the truth.

Exhibit A for that proposition is a news release recently issued by Comptroller Susana Mendoza about the state’s Comprehensive Annual Financial Report that put a positive spin on Illinois’ disastrous financial situation.

“Illinois Cut Its Deficit In Half in Fiscal Year 2018, Annual CAFR Shows,” the headline on her office’s press release read.

Fortunately for Mendoza, news reporters, who are generalists, not specialists, not only took her summation at face value, but also mostly failed to track down financial experts who would have had a different interpretation of the numbers.

Specialty publications revealed the real story.

Yvette Shields at The Bond Buyer reported that the state is “covered in red ink.”

“Illinois’ overall fiscal condition continued to deteriorate in fiscal 2018, according to the overdue comprehensive annual financial report,” Shields wrote.

Wirepoints financial analyst Mark Glennon offered an even-more-apocalyptic analysis that asserted the state was “hit by a record $47 billion loss.”

“The State of Illinois recently reported its biggest annual financial loss ever. Instead of clear reporting on that, we’ve seen perhaps the most glaring example yet of how the state’s finances can be misunderstood, misreported and intentionally distorted,” he wrote.

How does one account for the difference in emphasis between Mendoza’s office and the outside analysts?

Mendoza’s office focused on the state’s “general fund” operating budget, claiming that Illinois “cut its general funds deficit by $6.849 billion — from a deficit of $14.612 billion in fiscal year 2017 to a deficit of $7.763 billion in fiscal year 2018.”

It is highly likely that Democrat Mendoza’s more favorable analysis was an intentional misdirection play designed to shield Democratic Gov. J.B. Pritzker from the same shots she took at former Republican Gov. Bruce Rauner.

How so?

Mendoza’s 2016 press release, issued during Rauner’s tenure, emphasized “net position” numbers, while this year’s cited the general fund.

“With no relief in sight, Illinois’ finances deteriorated at an alarming rate in fiscal year 2016, as net deficit totals spiked to a staggering $126.7 billion. … The state’s [CAFR] paints a worsening outlook for the state’s financial future on this un-sustainable path. Mendoza said the CAFR findings reflect a lawless fiscal climate,” that press release stated.

“That ‘staggering’ negative $126.7 billion is now negative $184 billion. … No moral outrage now from Mendoza, however,” wrote Wirepoints’ Glennon.

The huge increase in the state’s “net position” numbers is partly explained by an accounting change that, for the first time, reflects health care costs owed to future retirees. Known as “Other Post-Employment Benefits,” these inescapable obligations remain unfunded by the state.

The fact that these benefits were not previously included in the state’s financial report reflects another accounting scam that was ordered corrected in the most recent report by the Government Accounting Standards Board, a private organization that is the source of generally accepted accounting principles used by state and local governments.

The state’s financial net position has grown steadily worse over the years, the result of a combination of factors.

Now standing at a negative $184 billion, the number includes the obligations for retiree health care.

In 2014, the state’s negative net worth was negative $45 billion, not including the retiree health obligation. It jumped to minus-$120 billion in 2015, minus-$126 billion in 2016 and minus-$136 billion in 2016, according to figures for all three years that do not reflect retiree health obligations.

New Jersey has the largest negative net worth of all 50 states. Illinois ranks second in that category, something few people would know if all they read was Mendoza’s news release.

************

Abdon Pallasch’s letter to the editor:

Dear Editor,

Had your columnist Jim Dey called the Illinois Office of Comptroller for comment before accusing us of “an intentional misdirection play” in his Sept. 10 column, we might have been able to save him from getting his facts wrong and misleading News-Gazette readers.

He bought hook, line and sinker the (Dey’s word) “apocalyptic” rantings of a fringe website that our office highlighted only rosy economic news from the Comprehensive Annual Financial Report (CAFR) because we wanted to make Gov. JB Pritzker look good and former Gov. Bruce Rauner look bad.

The problem with that misrepresentation is the period covered by the recently released CAFR is fiscal year 2018, which was July 1, 2017 to June 30, 2018. Bruce Rauner was governor at that time. Had our goal been to make Rauner look bad, we would have trumpeted the worst numbers chronicled by the CAFR and pointed to the governor at the time.

In fact, our apolitical news release highlighted a few of the more interesting numbers, good and bad, and invited everyone to explore all them numbers in the CAFR:

“The Comprehensive Annual Financial Report (CAFR) released today shows Illinois cut its general funds deficit by $6.849 billion – from a deficit of $14.612 billion in fiscal year 2017 to a deficit of $7.763 billion in fiscal year 2018. That is largely because of a refinancing of state debt from high-interest to low-interest repayment.

“The state’s total assets were approximately $53.9 billion on June 30, 2018, a decrease of $400 million from June 30, 2017. The state’s total liabilities were approximately $248.1 billion on June 30, 2018, an increase of $33.3 billion from June 30, 2017. The state’s largest liability balances are the net pension liability of $133.6 billion and the other post-employment benefits (OPEB) liability of $55.2 billion.”

That $55.2 billion OPEB number is a new calculation required to be included in every state’s CAFR’s this year, which made most states’ numbers jump, as did most states’ pension debt projections. That was all in our news release and extensively detailed in the CAFR itself. Comptroller Mendoza has been outspoken about Illinois’ need to address its pension shortfall.

We expect misinformation from fringe websites. We expect better of the News-Gazette.

-Abdon Pallasch
Director of Communications, Illinois Office of Comptroller

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Daniels

Mendoza the top Madigan lackey, probably can’t balance her own checkbook, a chronic liar. But she did play soccer in grade school, so that’s something to build a mayoral campaign around.

s and p 500

There’s a story out of Philly about how a long time teacher just got cancer, possibly from asbestos in the buildings. The union is livid and they are demanding $100 million immediately to remove asbestos from all of the school buildings. PFT is ignoring the fact that the school district’s unfunded pension liabilities are a major reason why the school district doesn’t have $100 million in loose cash to spend. The state of Pa. doesn’t have the cash, either. Believe it or not, states and schools actually have to post “profits” and can’t take $50 billion hits on their income… Read more »

Shirley Miller

What about the children exposed to the asbestos?

nixit

Sooo many thing wrong with that press release: 1) Totally misleading title: “ILLINOIS CUT ITS DEFICIT IN HALF IN FISCAL YEAR 2018” Of course, they explain it later, but they know this is the phrase the search engines will pick up. Very disingenuous. 2) CYA: “Loss of state data by outside vendor a key factor in delay of report’s release, as forewarned by Comptroller Mendoza” “I told you so” is so amateur hour. No one gives a damn. More words were spent explaining the delay of a report now published than the ginormous deficit in the report. If you knew… Read more »

nixit

More fun:

“At June 30, 2017, the State’s proportionate share of the liability was 49.669% based on its contribution requirement. This is a decrease of 2.661%…”

Not 50%. Not 49.7%. Not 49.67%. 49.669%. Such precision! Let us know immediately if this moves .005% in any direction so we may avert financial disaster.

Mike

Did the News-Gazette delete from its website the above referenced letter to the editor written by Abdon Pallasch, the Director of Communications for Illinois Comptroller Susan Mendoza?
https://www.news-gazette.com/opinion/letters-editor

Cass Andra

We can’t and the legislature won’t put them under oath. S.E.C. largely exempts municipal issuers. The judicial and legislative systems depend on adversarial presentations being sorted out by supposedly neutral deciders. The result is to be expected in the light of debates on climate change, pain killers, tobacco and guns. Fighting back is tiresome when the media are ignorant and partisan. Read another Churchill bio and soldier on!

NB-Chicago

Fantastic job socken it to flim-flam/spin mister suzie m!!! Duping the dullard public& press is the easy part the machine figuers. Fooling the bond markets is all they really care about–to keep the gravey train running..they’re scared to death of credit downgrades. But sure, bond markets would have picked up on the $47b OPEB debt? Yes?

NB-Chicago

Does Mendoza’s misleading/ false press release claims get into any misleading bond investor territory? Or, maybe that’s to much of a stretch

Cass Andra

If the rating agencies were honest and would reduce the ratings to below investment grade, a lot of funds would stop buying them. Fund managers generally use other peoples’ money and cover their butts (bets?) with fine print. Those who “guard” us take their money up front and investment managers who buy the bonds generally go by the ratings. Rest assured that underwriters, bond lawyers, auditors, actuaries and investment managers are well-insulated against liability for the risks they take. Regulators are mostly in the pockets of the foregoing. If not, they are understaffed or lack the budget to rein in… Read more »

debtsor

Ablon’s twitter feed is nothing more than retweeting the tweets of his boss, with a mixture of Orange Man Bad retweets.

Really, in today’s social media driven environment, the Director of Communications can’t be bothered to tweet anything other than Orange Man Bad? I don’t want to stoop to the Democrat’s name calling, but sure are plenty of word for this guy, and none of them are very nice.

U 221f

You guys nailed it again! I so hope more media outlets and citizens of this disaster of a state catch on to your expert analysis and clear writing about the crises we face. Sure, the train is already chugging down the track and you guys have been screaming that the bridge has been blown up by the bad guys (dem pols) for some time now, and even if someone pulls that big brake lever it’s still too late to stop it from streaking over the cliff, but at least you guys are trying. Thanks for that.

StatePensionMillionaires

Nice work Mark and Ted, and whoever else is helping to call out these legislators who have driven the once great state of Illinois to a financial cliff. No more taxpayer passivity. Make or break time.

Remember….a promise is not a promise in the absence of honest dealings….

Adam

I just want to say that mark and Ted are true heroes. These guys are doing heroic work for Illinois citizens. Keep it up, because I think you are really starting to expose all these criminals. Madigan, Cullerton, Harmon, Rich Miller, Mendoza are all nothing but union-owned stooges who don’t care at all about the majority of Illinois citizens. Public unions in Illinois are true criminal organizations, and the day of their financial collapse will be a day I am smiling ear to ear.

Joan

Very foolish to pick a fight with the guy who has been called the most dangerous man in Illinois. Mark, I hope you take this to the national media and really expose them the like you did with New Trier, Northwestern’s president Shapiro and other things..

joe blow

Numbers and facts are Illinois crony politicians worst enemies. Democrats pulled the same crap back in the 90’s when Bill Clinton “ran a surplus” no he didn’t! He borrowed money from Social security and the national debt didn’t decrease one stinkin penny! The Chicago economy is on fire right now and the morons running the state still can’t come even close to a balanced budget, can you imagine how bad things will get when the markets turn? Yikes! Their solution is “more revenue sources” I’m sure… Thank you Wirepoints for calling out these lying crooks on their lies!

MikeH

Good to see she’s following the time-honored leftist tradition of name calling when her position cannot be defended.

nixit

What Menzoda’s clan fails to understand is that the comptroller’s office should be INDEPENDENT. We don’t need politics mixed with accounting. We don’t need her opinion on who’s to blame for a budget impasse, only that the lack of a budget has “x” impact on the financial health of the state. Just present the financial facts – all the facts – in a way we can all understand. No sugar coating, no hiding numbers on a balance sheet, no obscure footnotes. Just the cold, hard numbers. Mendoza is unable to separate her partisanship from her official duties. She is unfit… Read more »

I am not defending her. Tell me which elected official is able to separate politics from policy? Clearly, the Illinois financial statements are nowhere near GAAP.

nixit

Judy Baar Topinka did a pretty good job. See an excerpt from her July 2014 “Comptroller’s Quarterly” below. No discussions of a “fair tax”. No finger pointing at specific politicians. Just the cold, hard financial truth: There’s not going to be enough revenue. I expect the Comptroller to be a hard-ass, no nonsense position, skeptical of all politicians. Looking ahead to fiscal year 2015, a gradual worsening of the budget situation is expected. In January 2015, the income tax rates are scheduled to drop, reducing the flow of income tax revenues into the state treasury. In addition, the fiscal year… Read more »

Adam

Mark, I think exposing them is very helpful and very great of you and Ted. However, at what point can the state start turning around for all this bullshit? What is your opinion on Peoria and the fact they are using 100% of their property taxes on pensions now? I can’t see that lasting more than a year or two. I feel like bankruptcy for cities and towns will have to be allowed in the next three to five years max. As far as healthcare for state workers, I feel like that is doomed to collapse too because more and… Read more »

S and P 500

The public should know how to read a CAFR, or at least the balance sheet and the income statement. If they don’t then they need to look at some Accounting 101 videos on you-tube. Yes, I guess that Mendoza is counting on nobody looking at the CAFR online and going to p. 19 and 20. The little footnote “beginning balance is restated due to GASB 75” is a brazen use of fine-print but it’s hilarious. The line item on the balance sheet for $20 billion “deferred outflows of resources” should have a footnote “this is an Enron entry that is… Read more »

Bob

Mendoza is a simple politician who probably has little grasp of such deep financial issues. The hired help puts these things together. When the hired help gets caught bamboozling the common folk they go on the defensive and begin their name calling and attempt to downplay the people who can intellectually call them out. I will take smart “fringe” people’s fact based opinions over politicians and the hired fluffers.

DantheMan

Like I said, the problem with Illinois is liberalism, which falsely thinks borrowing=income. Conservatives know the correct formula is………………………… borrowing = debt. The liberal formula for taxes is… taxes = money redistribution. The conservative formula is.. taxes = legal stealing. Finally, the liberal overall financial formula is… high taxes + high borrowing = votes. The conservative formula is … high taxes + high borrowing = bye bye.

Gemini

Amen brother. Book me on the next plane to Florida.