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.
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.
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:
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.
Director of Communications, Illinois Office of Comptroller