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.

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PensionActuary1058
2 days ago

Mark, I think you are correct about the fair tax being in trouble. This is anecdotal, but I know a good number of people in my peer group, which is basically yuppies, that are ardent Biden/Democrat voters but are not voting for the fair tax. Additionally, do you really think a 20% across the border income tax increase would really solve anything? By my calculations almost any type of tax increase or spending cut would be a drop in the bucket. At this point I’m not sure Illinois has a way out of this financial mess that doesn’t involve a… Read more »

Mike Williams
2 days ago
Reply to  Mark Glennon

You’re a much nicer guy than I am Mark. I don’t give a rip how badly the public pensioners get hurt.

Governor of Alderaan
2 days ago
Reply to  Mike Williams

No sympathy here. These people chose to be bystanders to their own retirement. They chose to put blind faith in Big Government and unions. Besides, their pensions are so immorally and obscenely generous that even at 50 cents on the dollar they’ll be in the 1%

PensionActuary1058
2 days ago
Reply to  Mark Glennon

It is always difficult to speculate but I can see some of the city pensioners getting 50 cents on the dollar, at best, of their pension benefit and possibly none of their retiree health benefit. I have to say that I do feel terribly for some of the pensioners who will get hit but at the same time those rank and file union members have been overwhelmingly electing their leadership for decades.

Poor Taxpayer
2 days ago
Reply to  Mark Glennon

Why should some one on Social Security subsidize the $100,000 a year pension when they only get $20,000 per year?
I think it should be the other way around.
After all the Honest hard working taxpayer had to work to age 68 and work 240 days every year on average for less money and benefits.

Riverbender
2 days ago

Just wondering here is that 20% increase in tax rate a mandatory thing? Doesn’t that have to be voted on before it is mandated? Naturally though with an upcoming lame duck session I know it is probably baked in the cake but just the same it is not mandatory as I think I see it.
Please correct me if I am wrong.

Last edited 2 days ago by Riverbender
NB-Chicago
2 days ago

Couldn’t illinois simply borrow more from MLF as opposed to issuing POS? or have they maxed out that credit card as well?

NB-Chicago
2 days ago
Reply to  Mark Glennon

Wow, looks like crazy desperation time!!..and meanwhile, its my understanding that much of CARES ACT fed funding remains unspent, which supposedly has to be spent on covid related expenses only? And recent BGA articale says state is going to issue bonds to cover depleted unemployment funds, but I thought illinois was approved for $11 billion line of credit to cover unemployment from fed back in may??…so I’m completely confused, other than to know it all looks hopeless

NB-Chicago
2 days ago
Reply to  NB-Chicago

Where is super spin-miester, little suzie mendoza lately to blame everything on rauner or some other bs?..she sure has been laying low

NiteCat
3 days ago

Except for public safety, social services and education, all other budget swallowing categories are baked (untouchable) into the state’s budget and cannot be cut back. These 3 categories are in general the pillars of what government is to provide and protect. They effect the taxpayers directly and are always the first & only categories to assume any budget cuts. Funny how that works.

Eugene from a pay phone
3 days ago

A bond is a debt supposedly subject to repayment. If the debtor can’t repay, the bond holder either re-negotiates the terms or loses the principle. Neither is an appealing choice. To save Chrysler and General Motors the Government allowed them to default on bonds held in pension funds and mutual funds held by retirees. Those retirees did the heavy lifting as corporate types and government types celebrated their success in saving American dinosaurs.

Mike
3 days ago

GM and Chrysler retirees were paid in full for all benefits earned under the Federal bailout.

The reference is to what bonds, what pension funds, what mutual funds, and what retirees?

Juicy Smollier
3 days ago

Trump just sealed it with the known, and even more about to be released, quid pro Joe criminal activity. He already was going to win, this is just the cherry on top. There is no path to Biden victory. I give the R actually a 35% chance of sweep, since Trump wins and Senate is going to go 53-47.

Old Spartan
3 days ago

What will be interesting to watch is how the OS (the final version) differs from the POS (the ‘Preliminary’ ) version. Normally there is a week to ten days between the time the bonds are sold and the POS is in circulation,and the date on which they are “closed”, which is when the OS comes out. The Final will have to have some interesting updates given what is occurring in the presidential, Senate and House races. It likely will be pretty ugly.

Susan
3 days ago

In hopes of economic survival, non-public-benefits-entitled Illinois taxpayers should try new tactics. Rather than continuing unsuccessful tactics like appeals to economic logic or social equity, taxpayers might try a capitulation strategy: Litigation to force immediate funding of entitlements including off-the-books OPEBS. Governor, You’re right, the public-benefits-entitlements are legal obligations of Illinois, and because of balanced budged amendment MUST become fully funded immediately. Yes, that means even at the expense of every working public employee termination, at the expense of cessation of all public spending not directly channelled toward funding contractually-obligated sub-social-security-age-year- old retiree benefits, including overpriced health insurance administered by… Read more »

Strelnikov
3 days ago

Love the use of “POS” to describe any IL government activity.

nixit
3 days ago

No employee bonuses in 2020 means no bonus payouts in 2021. Next year is going to bring either pay cuts or stagnant wages for most workers. Well, everyone except the public sector.

Poor Taxpayer
3 days ago

Buying Illinois Bonds is like giving an alcoholic liquor.
Should be illegal to allow them to run a HUGE PONZI SCHEME.
No reason not to put the unborn generations in debt for life.