By: Mark Glennon*
It’s always fun to compare what governments say in bond documents, where falsehoods can lead to fraud charges, to what the general public has been led to believe. Illinois newest bond offering is no different.
But first, what might be more interesting is what’s not written and is between the lines.
The timing of Illinois’ new $850 million bond offering is telling, to put it gently. Perhaps more like “stunning,” as one member of the municipal bond community told us. It almost certainly means the “Fair Tax” proposal isn’t polling well. It’s on the November 3 ballot and, if it fails, the additional revenue from a progressive tax increase of over $3 billion won’t happen.
So, the state appears to be rushing to raise what money it can before investors see what’s likely to be bad news – bad news from their perspective, that is. Muni bond folks love, love, love new taxes because they make bonds safer and allow for more borrowing. For that reason, the state may well see credit downgrades if the tax measure fails and, in any event, would have to pay much higher interest rates on new bonds.
In addition, worries may be growing that Democrats won’t win the White House and Senate, dimming hopes of a federal bailout.
The state is trying to price the bonds this week, which will be done through a competitive bidding process. And the state is being particularly aggressive about getting bids, according to our source, indicating that it’s very worried about how that process will go.
Turning to what the state is telling investors about its new bond offer, that’s in what’s called the Preliminary Offering Statement, or POS.
The new bonds would be general obligation bonds, which means they are not secured by a mortgage of any kind so buyers must rely mostly on the state’s overall creditworthiness.
The first matter that should surprise you from the POS is on the issue of how much more revenue the state will get if the Fair Tax proposal passes. That’s obviously important to the state’s credit.
Only $3.1 billion, according to the POS, which is significantly less than you always read. In virtually everything written about the proposed new progressive tax rates, you will see estimated new revenue as either $3.4 billion or $3.6 billion, as in these reports from the Associated Press and Reuters, based on earlier claims by Fair Tax backers.
And what happens if the Fair Tax proposal fails?
Just last month, Lt. Gov. Juliana Stratton told us to fear a 20% across-the-board income tax hike. “[L]awmakers will be forced to consider raising income taxes on all Illinois residents by at least 20% regardless of their level of income,” she said.
No, the POS says what should be obvious, which is that spending cuts might make up for some or perhaps all of the missing new revenue. [“T]he State would need to reduce expenditures, adjust revenue collections or approve a combination of revenue adjustments and reductions in expenditures,” says the POS. Besides, a 20% income tax increase would be far larger than the Fair Tax increase.
The POS also provides a nice reminder about the wild card expense Illinois faces for Medicaid. That’s a huge item, consuming about 14% of the state budget. But Illinois, like most states, can’t say whether that might rise still further. That’s due to uncertainty about where federal law is going on the Affordable Care Act and health care in general. Medicaid costs are a huge challenge for Illinois, though not often discussed.
Finally, the biggest question hanging over Illinois’s near-term financial challenges got very little attention in the POS, which is probably appropriate because it has been so widely discussed: Will the federal government come through with another assistance program for state and local governments?
Illinois is banking heavily on more cash from Washington, as are many other states, though Congress is at an impasse and the president must eventually sign on. Give credit to New York Gov. Andrew Cuomo for at least being candid about what others are counting on but don’t say: “If there is no (federal bailout) package by Election Day, then I believe the next president will provide federal aid,” he said, adding, “I believe the next president is Mr. Joe Biden.”
So, maybe Illinois’ POS should have concluded by telling investors something like this: “We sure hope Biden wins because he’ll support bailing us out. If he doesn’t, look out.”
*Mark Glennon is founder of Wirepoints.