By: Mark Glennon*
Never mind if the market is already trading Illinois general obligation bonds at junk levels, as The Bond Buyer reported today. I say credit rating agencies should wait until next month to downgrade them to junk because, well, it would be such an appropriate anniversary.
July will be the ten-year anniversary of when credit rating agencies figured it might be wise to downgrade subprime mortgage securities igniting the Great Recession.
The subprime meltdown had already begun by July 2007, but that’s when most rating agencies began their downgrades. Many subprime lenders had already gone bankrupt, including Accredited Home Lenders Holding, New Century Financial, DR Horton and Countrywide Financial. Home prices had begun falling almost a year earlier. AIG had stopped issuing guaranties on subprime securities. Bear Stearns had halted redemption on some of its subprime funds. Freddie Mac had ceased buying subprime mortgages. The list goes on.
So it is with Illinois and many of its municipalities including, most importantly, Chicago: The ratings agencies are telling us what we already saw. That’s not to say Illinois bonds are as risky as subprime securities were. Far from it. It’s the lateness of the call by the credit rating agencies that is comparable.
Rating agencies are hardly alone.
Plenty of others share the blame for why Illinois has slept until the flames are upon us. The press is forever suckered by phony government budgets and gimmick legislation. Ignorance about pensions remains rampant. Quack populists exploit clueless voters with harebrained ideas like the Privilege Tax and a financial transactions tax. Bill after bill is passed into law by innumerate lawmakers willfully ignorant about economics or even what their legislation says.
In the very near term look for two topics to emerge.
Triage is first. Two rulings this week by federal judges basically said “Oh, by the way, the law is the law. Those federal consent decrees mandating Medicaid payments mean what they say.”
In other words, certain Medicaid expenses cannot be shoved off with the rest of Illinois $14 billion of unpaid bills. It doesn’t matter that the legislature passed continuing appropriations for things like bond payments, pension contributions and salaries, which so far have been getting paid first. Some kind of sharing or prioritization for those Medicaid bills now has to be worked out. This will be like a battlefield surgeon who has to decide whom to let bleed out.
Second, the state budget has been consuming headlines, but attention will soon return to Illinois’ countless insolvent municipalities, including Chicago and many school districts. They are looking to the state for help in one form or another, but not much will materialize. The money just isn’t there.
In other words, it will become apparent that drunks are looking to a drunk for help standing up. Illinois’ fiscal crisis has to be seen for what it is — a consolidated crisis of state and local governments. That’s where the numbers are mind-blowing.
In the longer term, our crisis will get worse until we have a five or ten-year, comprehensive, believable plan to turn turn things around. That plan must include pretty much every pro-growth reform ever discussed. To avoid further flight, only sensible, moderate tax increases passed concurrently with the other reforms will help.
That plan must include debt reduction, including pension liabilities, and that requires bankruptcy, which we wrote about last week. Same for Chicago and many other municipalities.
*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
“That plan must include pretty much every pro-growth reform ever discussed. To avoid further flight, only sensible, moderate tax increases passed concurrently with the other reforms will help.”
Any tax increase is goes against “pro-growth reform.” At most, tax freezes, are in order along with pro growth regulation reform and big spending cuts.
Expecting addicts to behave rationally is irrational.
The politics is especially daunting where civil disorder could very well be a byproduct of default or cutbacks. Let’s posit that teachers and public safety officers go on strike (howsoever illegal the strike). What’s the plan for maintaining a modicum of order? Probably a side-deal to prefer certain “essential” employees’ expectations while shorting the bondholders. Can the already retired public employees be given pension haircuts while keeping the active-essentials on the job? I speculate that this was a consideration by the bankruptcy judge in Detroit. He approved what was ostensibly a small pension haircut, giving the appearance of support to… Read more »
State and municipal bankruptcies will be the toughest hurdles to get over, and no real recovery can begin without them. We need to be screaming at our congressional delegation in Washington to rewrite Federal bankruptcy code to allow what must be done. The lack of urgency by our elected reps. on this issue is stunning. We must focus pressure on the very few Illinois congressmen smart enough to understand this issue. Alas, I fear that none of them has the courage to author the legislation, educate the public, and move it through congress. The house of cards is about to… Read more »
Do the pension payments get first in line priority by law?
Not really. That’s really the point of those two Medicaid court decisions this week. Illinois, by statute, has a continuing appropriation to fund the pensions and pay bonds. The bonds further have a statute that purports to say they get paid first. But the courts effectively said that those Medicaid payments ordered by an earlier court decree have to be paid, and that order should trump the IL statutes for pensions and bonds. Maybe IL will cut something else to get those Medicaid payments made, but we will have to wait to see how it sorts out.
thanks,
not a big fan of ST–M. Brown but this was his article on first-in-line. http://chicago.suntimes.com/politics/do-illinois-core-priorities-for-payment-match-yours/
Since the taxes are too high in IL to begin with, they too have to be reduced or selectively eliminated to be competitive with other better-managed states and to grow businesses and allow families to retain a significant amount of their hard-earned incomes. Join the 7 other states with no income tax, set the maximum property tax at 1%, petition the Courts to announce that the pensions and City of Chicago are bankrupt, split Chicago into separate cities of under 200,000 , deport the illegals and declare the City to be a Sanctuary for Americans and legal-entered others, privatize the… Read more »
What cannot be paid WILL NOT BE PAID. Simple math will trump the: !) “but we have a CONTRACT”, as well as any 2) state law passed to prioritize any debt. No money means no one gets paid. This is a very serious problem, and it is going to hit gov employees right in the mouth very soon. The fact is they are lucky it has not hit already.