STUMP » Articles » Not Even a Petite Bargain in Illinois Budget Wrangling » 25 May 2017, 06:03

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Not Even a Petite Bargain in Illinois Budget Wrangling  

by

25 May 2017, 06:03

The deadline clock is ticking in the Illinois Legislature, but they’re about as serious as they ever are. I checked in about a month ago, and there had last been something signed in June 2016.

The deadline is supposedly May 31. We’ll see.

DEMOCRATS GO IT ALONE

Senate Dems call budget a ‘compromise’— but GOP calls it ‘incomplete’:

Illinois Senate Democrats passed what they called a “compromise” budget on Tuesday, even though it attracted no Republican votes, was denounced by the GOP and failed to include the one piece Gov. Bruce Rauner said was most important.

With pressure mounting as the legislative session inched toward a close, Democrats approved a budget and tax package that includes a politically unpopular income tax hike that may never see the light of day in the Illinois House.

Before the measures cleared, sans any Republican support, Rauner warned legislators about the missing piece of the budget puzzle.

“Let me be clear, to get my signature, any agreement must include real property tax relief,” the governor said.

And underscoring the political nature of the budget impasse and the timing of the governor’s race, the Rauner-led Illinois Republican Party on Tuesday said the Senate passage “confirms that the entire Democratic Party’s position is to raise taxes while protecting the status quo.”

The party has tried to pin a proposed income tax hike on Illinois House Speaker Michael Madigan for months, saying he’s trying to get a tax increase without the governor’s preferred reforms.

Amid all the outcry, Senate Democrats approved three budgetary measures: a revenue bill that includes increasing the personal income tax rate to 4.95 percent; a spending bill that relies on the income tax hike and other revenue increases and an implementation plan that also includes cuts.

This will come as no shock: the cuts are pro forma.

The income tax hike is retroactive:


Retroactive tax hikes are a bad idea.

So are retroactive pension hikes.

And this piece says this plan is unlikely to pass the House anyway.

‘CLEVER’ IDEAS

So various people are trying for easy wins.

Like legalizing marijuana and taxing it:

Illinois Looks to Marijuana to Plug Huge Hole it Its Budget
Tax revenues generated by legalized marijuana, plus shedding the huge costs of arresting and jailing nonviolent offenders, are powerfully appealing to fiscally beleagured states.

…..
Broke in Illinois.
Illinois is focusing on the potential of marijuana taxes to pull it out of a fiscal tailspin. State lawmakers face a staggering $4.6 billion operating shortfall.

Lawmakers, confronted with the potential for yet another credit downgrade, are considering a deal that would raise taxes rather than curtail spending, according to independent watchdog group Illinois Policy.

This month, with the state Legislature extending a budget impasse into the third year, the Civic Federation’s Institute for Illinois’ Fiscal Sustainability issued an 86-page report on why the proposed budget from Gov. Bruce Rauner won’t work. They deemed state leaders’ work on the issue a “spectacular failure.”

Marijuana to the rescue?
Illinois has had a limited medical marijuana program in place since 2016. State Rep. Kelly Cassidy and state Sen. Heather Steans have co-authored legislation to make recreational marijuana legal in Illinois. The two lawmakers recently held the first of a series of planned meetings to discuss the issue.

“We want to look and understand what is happening around the country on taxing and regulating [marijuana], and if there are other ways to be thinking about this,” Steans said at the meeting, according to the Columbia Chronicle.

The pair also authored a commentary for the Chicago Tribune arguing legalized marijuana offers a new approach to the problem but partisan politics is blocking consideration of this as a budget solution. They note Colorado brought in almost $200 million in marijuana tax revenue in 2016, a stunning amount of money but a drop in the bucket for what Illinois needs.

Then there are multiple proposals up for pension changes.

I don’t really see much reason to analyze any of them right now. But in case you want to see what’s out there:

The budget wrangling is taking center stage right now, and I don’t feel like dealing with pension bills that may just end up getting thrown away.

UNPAID BILLS STACK UP

Yes, this is partly a tactic by the state comptroller, but I really can’t fault her without an official budget. At the time, the state was $13.3 billion in arrears.

It’s added up a bit more since then.

$14,410,796,958.30
GENERAL FUNDS PAYABLES BACKLOG
AS OF 5/24/2017

Some articles from last week on the situation:

Illinois’ unpaid bills reach record $14.3 billion:

Illinois’ unpaid bill backlog has hit a record high of $14.3 billion as the legislature nears a May 31 budget deadline, the state comptroller’s office said on Wednesday.

The bill pile jumped from $13.3 billion after the governor’s budget office this week reported more than $1 billion in liabilities held at state agencies, the comptroller said.

Illinois is limping toward the June 30 end of its second straight fiscal year without a complete budget due to an impasse between Republican Governor Bruce Rauner and Democrats who control the legislature.

“It’s clear the Rauner Administration has been holding bills at state agencies in an attempt to mask some of the damage caused by the governor’s failure to fulfill his constitutional duty and present a balanced budget,” Comptroller Susana Mendoza, a Democrat, said in a statement, adding that the governor’s office was keeping lawmakers in the dark about the true size of the backlog.

…..
Lawmakers face a May 31 deadline to pass budget bills with simple-majority votes. The Senate on Wednesday passed pieces of a long-awaited package to stabilize state finances, including budgets for the current and upcoming fiscal years, authorization to borrow $7 billion to pay down the bill backlog and an overhaul to state pensions.
…..
The busy legislative day also included Senate passage of a gambling-expansion bill authorizing a Chicago-owned casino and a school funding revamp that allocates $215 million to help Chicago’s cash-strapped schools pay teacher pensions this year.

Rauner’s office rejected the school bill, but did not immediately comment on the other legislation.

ILLINOIS’ UNPAID BILLS JUMP TO $14.3B:

New numbers from the Illinois comptroller’s office show that Illinois’ unpaid bill backlog has climbed to more than $14 billion. In August 2016, Moody’s Investors Service predicted Illinois’ bill backlog would reach $14 billion by summer 2017.
Illinois’ unpaid bill backlog has increased to $14.3 billion from a previous balance of $13.3 billion. The Illinois comptroller’s office announced the staggering $1 billion jump in unpaid bills in a May 17 press release.

In August 2016, analysts from Moody’s Investors Service, a prominent credit rating agency, predicted Illinois’ stack of unpaid bills would reach $14 billion by summer 2017.

In March, Moody’s warned that Illinois’ ongoing budget gridlock and failure to pay its bills could lead to further credit downgrades, which could result in Illinois becoming the first “junk”-rated state in the nation.

Illinois’ mounting pile of unpaid bills reveals that the state continues to spend money faster than it takes it in.

Many Springfield politicians think a tax hike would solve this problem. But more tax revenue would just paper over the state’s spending problem.

“Grand bargain” 2.0 offers no spending reforms

Recent tax hike proposals coming out of Springfield prove lawmakers learned nothing from the 2011 income tax hikes, which were unaccompanied by real spending reform.

State Sen. Bill Brady, R-Bloomington, has introduced a new proposal to supplement the “grand bargain” budget deal. Brady’s plan calls for retaining the grand bargain tax hikes, which include an income tax increase and an expansion of the sales tax that would be expected to bring in $5.4 billion and $300 million in tax revenue, respectively, as well as casino expansion fees, which would bring in an estimated $1 billion.

Brady’s plan may also rely on revenue gathered from the sale of the Thompson Center, estimated at $200 million.

Some of the “vendors” don’t have much choice — they’re essentially outsourced state services — but if one were a “regular” vendor with non-government customers, I would give Illinois absolutely no credit whatsoever. And build up one’s private business.

And look to expanding one’s geographical footprint beyond Illinois.

BOND MARKET REACTIONS

Illinois Punished by Market as Deadline Nears Amid Fighting

State’s yields rise to record over benchmark amid gridlock
Less than two weeks remain in regular legislative session
With less than two weeks left in the regular legislative session, Illinois lawmakers and Governor Bruce Rauner are still divided on how to end the worst-rated state’s nearly three-year budget impasse. Investors aren’t pleased.

Bondholders are demanding yields of 4.49 percent on Illinois’s 10-year bonds, some 2.45 percentage points more than those of benchmark tax-exempt debt. That’s the biggest gap since the Bloomberg indexes began in January 2013.

After May 31, a three-fifths majority will be required to pass anything, making a deal even more difficult to reach. Senate Democrats advanced several bills that had been considered part of a bi-partisan compromise on Wednesday, but they were unable to pass a spending plan for lack of Republican support.

“We’re two weeks away from the 31st and that’s the deadline that’s set,” said Dennis Derby, a money manager in Menomonee Falls, Wisconsin, at Wells Fargo Asset Management, which holds Illinois bonds among its $40 billion of municipal debt. “They’ve had substantial time to work on this. So far we haven’t seen any substantial progress.”

Then there’s the issue of swaps:

Potential Downgrades Once Again Threaten to Terminate Illinois’ Swaps

With the end of the Illinois General Assembly legislative session looming and a budget compromise still out of reach, the potential for ratings downgrades once again threatens to trigger termination of Illinois’ interest rate swap agreements, which would cost taxpayers tens of millions of dollars.

Governments enter into interest rate swaps on variable-rate bonds in order to save on total interest payments compared with what they would pay by issuing standard fixed-interest bonds. In doing so, they take on a number of risks associated with both the swaps and the underlying variable rate bonds. A deeper examination of how these agreements work shows how some of these risks have become more likely for Illinois as the State’s fiscal condition worsens.

…..
Critics of swaps often portray them as a bet that future interest rates will be high, in which case issuers such as Illinois will receive more from the counterparty than the fixed rate that they pay. Conversely, if rates are low, then the issuer “loses” and the counterparty “wins.” But this inaccurately portrays swaps as the only instance in which an issuer takes a risk involving interest rates. When an issuer sells un-swapped variable rate bonds, it is inherently betting that interest rates will be low. When it sells regular fixed rate bonds, it is betting that interest rates will climb higher. A synthetic fixed rate swap, like Illinois’, puts the issuer in roughly the same risk position with regard to interest rates that it would be in with regular fixed rate bonds.
…..
Variable Rate Debt and Rollover Risk

Illinois has a single series of variable rate bonds, Series 2003B, with an outstanding par of $600 million. As of May 17, 2017, the variable rate that would be paid by the State on the bonds is between 0.70% and 0.78%. Like many variable rate bonds, this series originally guaranteed the holders the right to demand repayment at any time (known as a “put” option). In order to prevent a sudden financial burden, Illinois entered into agreements with banks that would remarket the bonds if they were put, and to buy the bonds if no other purchaser could be found. These agreements, known as letter of credit facilities, expire periodically and need to be renegotiated. However, if the issuer’s credit rating is low, banks demand more compensation if they are concerned that the bonds might be difficult to remarket.

Ya think?

CLAIM THAT ILLINOIS IS NOT A BIG SPENDER

This one is hilarious… well, darkly funny.

LOTS OF PEOPLE THINK THEY CAN SOLVE ILLINOIS’ BUDGET MESS—BUT IT’S NOT THAT EASY

Compared to other states, Illinois has fewer state workers, spends less on Medicaid per patient and owns a worst in the nation record for supporting local schools. So budget-balancing without tax hikes will mean cutting into muscle.

…..
Just imagine amateur Illinois budgeteers weighing in on the value of the state tax break for semen used in the artificial insemination of livestock, or the sales tax exemption for sacramental wine. Those are two of the tiniest of some 270 such breaks that collectively cost the state $9.4 billion in fiscal 2015—enough to fill the deepest of budget holes.

Livestock tax breaks notwithstanding, sacred cows abound in the real life game of budget making. And that is a critical reason why politicians in this fiscal basket case of a state are having such trouble agreeing on a budget plan that calls for more taxes or less spending or some combination of both.

Perhaps the biggest impediment to an agreement is that the conventional stereotype of Illinois government as marbled with big ticket, easily cuttable fat defies reality.

On a per capita basis, no state government employs fewer people than Illinois. No state picks up a smaller percentage of local education bills. Per patient Medicaid spending is well below national norms. And the pile of debt now owed to state administed public pension systems is staggering.

There’s a lot more at that piece.

Thing is, it’s bullshit:

FACT-CHECKING BGA’S CLAIMS ON ‘LOW-SPENDING’ ILLINOIS

While the Better Government Association has claimed Illinois’ budget contains no fat to trim, a deeper analysis reveals the state has many areas of expensive inefficiency to reform in state and local government costs, the Medicaid program and K-12 education.

The Better Government Association, or BGA, an Illinois government watchdog, recently said Illinois government is lean, with no meaningful options for spending cuts. The group claims three barriers prevent the state from pursuing major spending reforms, and implies tax hikes are the only solution to Illinois’ budget crisis.

But while BGA’s claims are correct on the surface, a deeper fact check finds those claims faulty and misleading to taxpayers and policymakers.

Compared with other states, the BGA says Illinois:

Has fewer state workers per capita
Spends less on Medicaid per patient
Has a worst-in-the-nation record for supporting local schools
Based on BGA’s analysis, there is nothing to cut because Illinois’ spending is either efficient or the state already spends too little on services to allow for any spending reforms.

…..
The BGA ignores that Illinois has one of the largest state-local bureaucratic webs in the nation

Ignored by the BGA in its analysis is the fact that Illinois state government spends billions in subsidies to prop up the most numerous units of local government of any state in the nation, plus the bureaucracies that run them. Local governments serve just 1,800 people per unit in Illinois, while in Texas they serve 2.5 times more people per unit, and in Florida they serve six times more people.

Local governments could not support that infrastructure were it not for billions in state subsidies that inflate local pensions, prevailing wages and collective bargaining agreements.

The BGA analysis also ignores that Illinois state workers are the highest-paid in the nation when adjusted for cost of living, and that these workers receive free retiree health insurance and Cadillac health care benefits. Moreover, Illinois state workers represented by the American Federation of State, County and Municipal Employees average nearly $110,000 in total yearly compensation.

Illinois government is not the example of efficiency the BGA implies. State worker compensation must be brought in line with what taxpayers can afford.

…..
Claim: “On a per capita basis, no state government employs fewer people than Illinois.”

Why it’s misleading: The BGA ignores that Illinois has one of the largest state-local bureaucratic webs in the nation.

The BGA’s focus on state workers per capita makes it sound as if Illinois is an especially efficient state. But Illinois’ low number of state workers per person is a function of its big population, not government efficiency.

A 50-state comparison shows the nation’s five most populated states all have the lowest number of state workers per capita in the nation. Big states have to hire fewer state workers per capita than states with smaller populations simply due to their economies of scale.

At the other extreme, states with the most workers per capita are the smallest states in terms of population. For example, Alaska, North Dakota and Wyoming are some of the smallest states and have some of the highest numbers of state workers per capita.
…..
Local governments’ inefficiencies are more easily seen when comparing the number of people Illinois local governments serve with other large states. On a per capita basis, the average local government in Illinois serves just 1,800 people.

Local governments in other heavily populated states serve far more residents. For example, the average local government in California serves more than 8,000 people, or 360 percent more than Illinois does, while Florida’s local governments serve on average 500 percent more people than Illinois’ governments do.

I elided over a lot — the rebuttal is rather thorough.

DEALING WITH PENSIONS

One of the big troubles, mentioned in the above rebuttal (that I elided over), is that the biggest drag on Illinois’s finances is its pensions.

And no, it would not be easy to cut that particular problem. I guess I agree with the BGA piece headline — that making big cuts that are necessary is not easy. It wouldn’t necessarily be simple, even. But trying to argue that Illinois is not a big-spender is laughable.

And given that iffy public finance piece from BGA, it undermines this particular claim from a BGA author – that it’s only the big $$ employees that are the problem with the pensions. If you can’t read the Crain’s Business piece, BGA also posted it at their own site. I will likely pull that one apart later.

One of the first things they have to do is change the Illinois state constitution to at least stop the accrual of additional pension benefits by current retirees.

The “clever idea” of trying to get employees to switch to DC plans … well, I think a lot of those employees would assume that they will get paid their DB pensions and thus wouldn’t opt for the new benefits.

EXPECT IT TO GET MUCH WORSE

Mark Glennon explains:

Brace for a Major Worsening in Illinois’ Fiscal Crisis – Wirepoints Original

……
Let’s start with what many see as the optimistic scenario, which is that Springfield agrees on a budget soon. That agreement would probably be roughly similar to what the Illinois Senate passed today — $5.5 billion in new taxes and $3 billion in spending cuts.

Many would breathe an initial sigh of relief if that deal passed. Credit downgrades would probably be avoided for now and many recipients of state money, now cut off, would have funding at least partially restored. Schools and universities would stay open for now.

But the reality of what that compromise wouldn’t accomplish would soon become apparent:

• Nobody is even discussing the lion in the room — the $180 billion of unfunded pension and healthcare liabilities for services already rendered by state workers. Pension contributions already consume a quarter of the state budget, and it would take billions more each year just to keep the unfunded liabilities from growing. When the current budget debate ends — no matter how it ends — Illinois will realize that the largest source of its crisis wasn’t addressed.

Yes, there is a pension “reform” bill on the table, but it’s based on the “consideration” model which is constitutionally suspect and would be litigated all the way to the Illinois Supreme Court. Even if it’s upheld, savings from it are extremely dubious and have never been documented.

• Most Illinoisans would focus only on the tax increase. Sixty-two percent say the budget does not affect them or anybody in their family. That’s foolish and selfish, but that’s the way it is. The business community, too, would see little to like — only gimmick reforms that soon will be exposed as cosmetic, and the corporate income tax would increase under the Senate bills passed today. In short, more people and employers would see more reason to leave.

• The full effect of the $3 billion in “cuts” is a mixed bag and unclear for now. Those cuts are off of a theoretical baseline, not against what’s been disbursed over the past year. So, some recipients of state money would have funding restored at least in part, but some would still face severe austerity.

• Nothing in the legislation would address the $14 billion in unpaid bills at the state level.

• There’s no relief being offered to struggling municipalities, though the Senate legislation apparently would have state taxpayers pick up the “normal cost” of the Chicago teachers’ pension. Illinois’ crisis has to considered on a consolidated basis with all its overlapping jurisdictions, especially in and around Chicago. It’s the consolidated picture that’s so overwhelming. Chicago will go bankrupt because of its pensions, which are rapidly bleeding down towards zero assets.

• Finally, Governor Rauner appears to have made a tax freeze a must-have for any budget deal by saying today that “real property tax reform” is essential for him to sign off on any compromise. He probably won’t get a permanent freeze from Democrats, though he apparently would now be content with a four-year freeze, i.e., a huge hike in year five.

Most galling is hearing sponsors of today’s legislation call it a “balanced budget.” Truly balancing the budget would take billions more in revenue or cuts.

…..

Let’s go back to property taxes where the deal may fall apart. That’s where Illinois’ crisis is burning white hot. A freeze would be nice for many taxpayers, but it won’t help towns and cities already in crisis. Property taxes now often over 3%, 4% and even 5% in many municipalities are fueling a death spiral. Nobody has offered a solution.

Downgrades to “junk” status are likely to come if a full budget isn’t passed, which will increase borrowing costs not just for the state but for municipalities, which suffer from secondary effects. However, Fitch, the ratings agency, said today that the May 31 deadline isn’t so important. After that, a 3/5 majority is needed to pass a budget. Fitch says it would give the state until June 30.

About Illinois’ creditworthiness, however, Mr. Market is already talking. As Bloomberg reported last week, investors are now demanding their biggest premium ever for holding Illinois bonds, 2.5% over the benchmark rate.

That rate is still lower than most individuals…or even companies… can get.

Comments from Richard Epstein:

Progressively Bankrupt

…..
The situation in Connecticut is mirrored by equal, if not greater, problems elsewhere, including in my home state of Illinois, which is in the midst of an unending fiscal crisis. But fortunately in Illinois there is a nascent movement for more genuine reform being spearheaded by the Illinois Policy Institute that recently released a book, An Illinois Constitution for the Twenty-First Century (for which I wrote the Introduction). The situation in Illinois (and Chicago) is dire. Once again, the simple explanation is that the state has long lived beyond its means. Right now, it has over $14.3 billion in unpaid bills, and growing.

As this volume indicates, Illinois needs a full-court press that addresses such key governance issues as redistricting, term limits, sunset laws, and its Constitution’s Amendment process. And politically, it is imperative to end Michael Madigan’s decades-long rule as Speaker of the Illinois Assembly.

Just last week, Butterball announced that it is closing its Montgomery factory west of Chicago, costing the state some 600 jobs. In response, it is easy to point to cheap imports from Mexico and other low-cost labor centers as the source of the problem. But that form of economic myopia ignores the powerful truth that it is only the poorly run states that suffer systematic competitive losses. It might be wiser for Illinois to find ways to reduce its sky-high worker’s compensation premiums, which help explain why companies like Hoist Liftruck have shuttered its Illinois plants, only to open up business in East Chicago, Indiana, taking many employees along for the ride. The difference in worker’s comp premiums between the two states is more than two-fold, with Illinois at $2.23 per $100 of payroll and Indiana at $1.05. The bottom line is that doing business in Indiana saved Hoist over $1 million in worker’s comp premiums in its first year alone.

But the long-term economic focus shouldn’t be exclusively on existing plants that move across state lines. Equally important is the business of attracting new firms with high growth potential, all of which have extensive choices on where to locate their new facilities. States like Illinois, Connecticut, and California are often last on the list of possible destinations.

Fortunately, under our federalist system, Illinois cannot do anything to stop current firms from leaving. But it can do something constructive to keep existing firms and lure new ones in. It can make the business climate more attractive by reducing the combined tax and regulatory burden. One useful indication of how this all works is found in Kentucky, which was able to attract a $1.3 billion investment in a state-of-the-art aluminum mill, creating some 550 new jobs in the state. The mill company’s CEO, Craig Bouchard, had previously been burned in dealing with unionized steel plants, which is one reason why he chose Kentucky, a right-to-work state, for the new plant. There, he does not face the same risk of union interference as he did with his previous steel mill in Illinois, where the United Steelworkers (whose labor contracts gave it powerful leverage to block any sale) forced Bouchard to do business with a Russian company that subsequently went out of business, costing Illinois yet more jobs.

…..
The powerful position of labor unions in the public sector also accounts for a second major dislocation in state and local governments, which is the persistent and unsustainable increase in pension obligations. In states like Illinois and California, public pensions created vested rights that give government employees, by state constitutional mandate no less, first-dibs on state revenues, making it increasingly difficult to discharge the standard functions that states have in providing police protection, educational services, roads and many other obligations. No one advocates ending all pensions, but it is critical to pare down the size of benefits for existing pensioners, and to require additional contributions from current workers to bring the system back into balance. State and local pensioners have to take their share of the hurt.

The size of the problem is well-captured in this thumbnail summary of the Illinois pension problem by economist Diana Furchtgott-Roth: “The actuarial unfunded liabilities for Illinois’s pension plans stood at $111 billion for fiscal year 2015, according to government estimates. The liabilities increased by more than 600 percent between 1999 and 2013 in nominal terms, and by more than 450 percent in real terms.”

This is clearly unsustainable, and no ill-conceived set of tax increases will be able to cover such an enormous expense. With respect to future employees, a shift to defined contribution plans should help matters, because under these plans, the worker has full responsibility for pension contributions, so these contributions do not constitute a major liability on the government balance sheets. But those future gains are too little and too late unless current pension liabilities can be pared back to prevent a looming fiscal crisis. The difficulty of this task has been compounded by the Illinois courts, which have refused to allow the legislature to narrow the ruinous state guarantee of pension payments.

It is quite clear that Illinois has passed the point of no return, even if Connecticut has not. But owing to the embedded political powers, little if anything can be done to salvage a situation that is careening toward disaster. Fortunately, the damage will be confined within the borders of the state unless the United States supplies an ill-advised bailout. That’s the beauty of our federalist system. In perhaps the most famous single remark on the matter, Justice Louis Brandeis wrote in 1932 that “a State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” Some of those experiments succeed. But many of them—as even the progressive Brandeis knew—fail.

No matter what people say, failure is always an option.

The question is how the failure manifests. Illinois is already deep in fiscal failure, and they’re not going to “grow” their way out of this. One way or another, the de facto, balance sheet bankrupt Illinois will default on at least some of its obligations. The question is which ones, how much, and when.

Compilation of Illinois posts


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