STUMP » Articles » Illinois Financial Disaster: State Taken Hostage » 29 June 2017, 06:32

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Illinois Financial Disaster: State Taken Hostage  

by

29 June 2017, 06:32

You would think Rauner has never been part of a negotiation before:

RAUNER’S REFORM DEMANDS: FROM 44 TO 0

Gov. Bruce Rauner has compromised over and over to strike a deal, to the point of abandoning every reform he once demanded. But no matter how much Rauner gave, House Speaker Mike Madigan never budged.

Illinois Gov. Bruce Rauner won the 2014 gubernatorial election on a 44-point Turnaround Agenda meant to “shake up Springfield.”

Rauner understood Illinoisans’ need for change. They were suffering under the worst jobs recovery in the nation. Homeowners were being squeezed by the nation’s highest property taxes. And pension costs were consuming a quarter of the state budget, crowding out everything from college grants for low-income students to services for the disabled.

Illinoisans voted for Rauner and his agenda to change how government does business, to revive the state economy and to provide relief to taxpayers.

Three years later, things have changed dramatically. Illinoisans still want reform, but repeated budget stalemates, a media narrative that the governor is unwilling to compromise and pressure from special interest groups has whittled down Rauner’s ambitious reform agenda. It’s gone from 44 priorities to zero.

Term limits on politicians: Gone.

Collective bargaining reforms: Gone.

Returning income tax rates to 3 percent: Gone.

And the remaining “reforms” in the compromise plan taking shape in Springfield have been watered down so much they’ll either do nothing to fix state spending or they’ll make things even worse.

I will get to Madigan’s demands later (as well as updating the legislative “activity” chart), but I want to take a sideline into negotiation.

NEGOTIATION BASICS: BATNA

Business schools often have some sort of training on negotiation, and there are a variety of techniques to be learned.

One of the foundational concepts, though, is BATNA — Best Alternative to a Negotiated Agreement

You’ll often see business types, when discussing a negotiation (haggling over a contract, trying to do M&A, etc.), to ask “What’s the BATNA?”

The concept is fairly simple: what if the negotiation doesn’t work out — that is, what if an agreement is never come to? What is the best thing I could get in that situation?

For many business negotiations, that means no deal is struck — at least one side or the other walks away. There was a reason one was attempting the deal in the first place, though – maybe both sides could get something better than what happens in the walkaway situation.

Here is the wiki description:

In negotiation theory, the best alternative to a negotiated agreement or BATNA is the most advantageous alternative course of action a party can take if negotiations fail and an agreement cannot be reached. BATNA is the key focus and the driving force behind a successful negotiator. A party should generally not accept a worse resolution than its BATNA. Care should be taken, however, to ensure that deals are accurately valued, taking into account all considerations, such as relationship value, time value of money and the likelihood that the other party will live up to their side of the bargain. These other considerations are often difficult to value, since they are frequently based on uncertain or qualitative considerations, rather than easily measurable and quantifiable factors.

Now, I was being snide above when I asked if Rauner had ever been in a negotiation before – obviously, he has.

Thing is: business negotiations differ from political negotiations. By a lot.

The biggest difference tends to be the players. And the consequences of failed deals. Illinois is showing this quite a bit.

One of the biggest problems with BATNA, and negotiation in general, is when at least one party is awful at valuing alternative outcomes. And by “being awful”, I mean not incorporating all the pertinent items in valuing them — such as externalities, longer-term effects, etc.

An example: negotiation with a union over a contract. Let’s say you’re in an industry that is pretty heavily unionized, and these are industry unions (as opposed to single employer unions). The unions and companies involved in contract negotiations both believe the outcome of a failed negotiation is a strike, which may last quite some time. Besides, the competitors also end up having the same contracts in terms of cost, so eh — why not? Let’s just agree on the union increases to pay and pensions. The strike would be more harmful.

But now there’s a long-term expectation set in motion, which makes it attractive for third parties without the union pressure to enter into that space and eat their seed corn.

Eventually, you end up with GM going bankrupt… at which point the politicians stepped in.

Oops, I guess my theoretical example wasn’t all that theoretical. The issue is that negotiations, especially for higher stakes, may be extremely difficult to value for the arc of history. The bigger the negotiation, the more likely third parties would affect any of the outcomes, and some of those third parties have different yardsticks for value (like, say, getting re-elected.)

Actually, negotiators having different goals is great — as long as they’re not zero sum (or negative sum) goals.

Let me pull out the description of negative sum from that second link:

The most difficult problems are negative-sum situations, where the pie is shrinking. In the end, the gains and losses will all add up to less than zero. This means that the only way for a party to maintain its position is to take something from another party, and even if everyone takes his or her share of the “losses,” everyone still loses in comparison to what they currently have or really need. This type of situation often sparks serious competition.

However, negative-sum disputes are not always lose-lose because if the parties know the pie is shrinking, it is possible their expectations will be low. A perfect example of a negative-sum dispute is the allocation of budget cuts within an organization. In this case, each department expects to have some funds taken away, but whether the outcome is a win or loss depends on how much money a particular branch gets in comparison to what they expected to have cut from their budget. So, if a branch was expecting to get a 30 percent cut and they only got cut 20 percent, which would be a win, even in a diminishing resource situation.

Negative sum situations in politics, though, are very nasty, because many do not want to admit the pie is shrinking, a.k.a., “resources” or fun money is dwindling away and not everybody can get their goodies they’ve “always” gotten.

From the same site, more on BATNA:

Guy Burgess and Heidi Burgess have adapted the concept of BATNA slightly to emphasize what they call “EATNAs”— estimated alternatives to a negotiated agreement” instead of “best alternatives.” Even when disputants do not have good options outside of negotiations, they often think they do.

…..
BATNA and EATNAs also affect what William Zartman and may others have called “ripeness,” the time at which a dispute is ready or “ripe” for settlement.3 When parties have similar ideas or “congruent images” about what BATNAs exist, then the negotiation is ripe for reaching agreement. Having congruent BATNA images means that both parties have similar views of how a dispute will turn out if they do not agree, but rather pursue their other rights-based or power-based options. In this situation, it is often smarter for them to negotiate an agreement without continuing the disputing process, thus saving the transaction costs. This is what happens when disputing parties who are involved in a lawsuit settle out of court, (which happens in the U.S. about 90 percent of the time). The reason the parties settle is that their lawyers have come to an understanding of the strength of each sides’ case and how likely each is to prevail in court. They then can “cut to the chase,” and get to the same result much more easily, more quickly, and less expensively through negotiation.

…..
The allure of the EATNA often leads to last-minute breakdowns in negotiations, particularly when many parties are involved. Disputants can negotiate for months or even years, finally developing an agreement that they think is acceptable to all. But then at the end, all the parties must take a hard look at the final outcome and decide, “is this better than all of my alternatives?” Only if all the parties say “yes,” can the agreement be finalized. If just one party changes his or her mind, the agreement may well break down. Thus, knowing one’s own and one’s opponents’ BATNAs and EATNAs is critical to successful negotiation

The BATNA is related to each party’s goals, but the problem arises when one party thinks they can get something outside of negotiation… and they really can’t.

WHAT’S THE BATNA FOR ILLINOIS?

I’m talking about the state of Illinois itself. There are multiple participants in this negotiation, though everybody is focused on Rauner and Madigan. No doubt, they are controlling actors, but there are plenty of politicians (and public employee unions) involved in this particular workout. I am not going to pretend to know what they expect outcomes to be… I know what I expect possible outcomes to be.

Here are some of the outcomes of not coming to an agreement on a budget:

1. Credit downgrade to junk

This could happen anyway, even with a budget, but without a budget, it’s pretty sure. Mainly because the external parties called credit rating agencies have their own credibility on the line.

There are lots of consequences of the upcoming downgrade.

Maybe I should wait until it happens, but given that Illinois debt is already trading at junk yields (pardon me, “below investment grade yields”, or, if I’m feeling really spicy, “high yield”), that Illinois would have to pay more to issue bonds would go without saying.

Here is an explainer piece at Fox Business that is fairly even-handed, but this part made me snort:

Will investors still get paid?

A junk rating won’t affect the state’s ability to pay bondholders. State officials have said those payments are their No. 1 priority.

Well, sure they are. For now.

2. Two big lotteries go away, and other lottery winners won’t get paid.

PAYMENTS TO ILLINOIS LOTTERY WINNERS WILL BE DELAYED WITHOUT PASSAGE OF STATE BUDGET

The Illinois Lottery will cease awarding prizes over $25,000 if a budget is not signed by July 1.

Lottery winners awaiting large payouts may have to find more patience, if state lawmakers do not pass a budget or stopgap legislation by July 1 the Illinois Lottery will be unable to award prizes over $25,000.

And remember that Powerball and MegaMillions is also going away.

Wednesday’s $90 million Powerball drawing could be last for budget-hobbled Illinois

Wednesday’s Powerball drawing could be the last for a while in Illinois, which is operating in a budget void as the state’s financial woes swell.

The budget stalemate under a Republican governor and rival Democratic leadership in the legislature could enter a third year if there’s no agreement by July 1. As the state credit rating risks being downgraded to junk status, leaders met this week behind closed doors for the first time since early December to try to hammer out a preliminary agreement.
But the multistate consortiums that operate the big jackpots aren’t feeling confident that their games will maintain integrity in Illinois so they’ve put in place plans to suspend the games.

Powerball could be suspended after the June 28 drawing and Mega Millions after the June 30 drawing. Meanwhile, Illinois-only games will continue to sell tickets but players with claims of more than $25,000 in winnings will experience a delay in payments because of the ongoing budget impasse in Springfield, said Illinois Lottery Acting Director Greg Smith.

Who is going to be sucker enough…. oh right, the type of people who play lotteries. Never mind.

3. Illinois universities could lose their accreditation:

SPRINGFIELD, Ill. (AP) — Illinois’ state budget impasse could affect the accreditation of universities in the state that have seen deep cuts in state funding in the nearly three years lawmakers have failed to agree on a spending plan.

The Higher Learning Commission, which accredits schools in the Midwest, recently issued a letter cautioning lawmakers that a lack of funding places Illinois universities at risk of losing their accreditation. The commission is obligated to sanction schools that are unable to provide necessary academic programs and financial aid.

The commission’s president, Barbara Gellman-Danley, wrote that the budget crisis has led to increased tuition, delays in grants for financially needy students, staff reductions and canceled capital projects. She said diminished cash reserves will hurt students.

4. Lots of third parties will be hurt — and have already been hurt.

Vendors go bankrupt due to the $14.6 billion in unpaid bills (perhaps some already have – I haven’t looked).

UPDATE: I spoke too soon. Springfield’s latest casualty: High-profile nonprofit decimated

Family Focus, a Chicago-based agency that focuses on small children and their families, will lay off 100 employees July 1. The number represents 71 percent of the organization’s staff, all of whom work directly with clients.

In a letter issued June 26, Family Focus CEO Merri Ex said the state of Illinois owes the agency $2.7 million for work accomplished, and nonpayment of those funds has created “a severe cash flow crisis.” Ex was not immediately available for an interview.

The layoffs will essentially shut down Family Focus, which serves 17,000 people in the Chicago area. Regular programming at all Family Focus locations will be suspended. Administrative staff will continue to work at the centers, to implement reduced services and answer questions from program participants.

Various municipalities will be affected, because they had been planning based on assumption of certain state funding (they shouldn’t have).

Oh wait, many have already been affected:

Illinois cities, towns, villages trapped paying ‘Illinois Penalty’ because of state’s poor credit rating

Even without being downgraded to junk status, as is expected if the state enters the next fiscal year without a budget, the Land of Lincoln is already in some bad company, and it’s towns, villages, and cities are trapped paying an “Illinois Penalty.”

Illinois is just days away from possibly being downgraded to junk bond status, which would be a first in the nation’s history.

Things are so bad right now that even Illinois Treasurer Michael Frerichs said if he wanted the state to buy its own bonds, “I would be prohibited.”

“The General Assembly limits where I can make investments,” Frerichs said. “We want to ensure that we preserve capital and that I’m not taking risks in my office’s investments and by that definition, the state of Illinois is too great of a risk for the state to invest in.”

For all the screeching over people dying due to revocation of part of Obamacare (that reality hadn’t already revoked), I wonder if there’s screeching for the poor Medicaid patients in Illinois:

Illinois Is Back in Court Over Medicaid Bills

Illinois will find out Friday if its finances will take yet another hit when a judge rules whether the cash-strapped state needs to immediately pay down at least $2.8 billion of unpaid Medicaid bills.

During a status hearing in Chicago on Wednesday, U.S. District Judge Joan Lefkow said she’ll rule June 30, which is also the last day for Illinois leaders to pass a budget before the start of a new fiscal year. Lefkow ruled June 7 that Illinois isn’t meeting its Medicaid funding responsibilities and ordered both sides to hash out a way to hasten the payments. Since then, negotiations have failed, according to a court filing from lawyers for the Medicaid recipients who asked Lefkow to order Illinois to pay $1.1 billion a month to catch up on new and old bills.

“Anyone who cares about the state’s financial future and anyone who’s looking to encourage the state to have what 49 states have — which is an annual budget — are looking for direction from Judge Lefkow,” Laurence Msall, president of the Civic Federation, a Chicago nonprofit that tracks state and municipal finance, said before Wednesday’s hearing. “It’s very significant.”
….
At issue is whether Illinois must give higher priority to the $300 million its Medicaid program pays hospitals, doctors and clinics each month. Because Governor Bruce Rauner and the Democrat-run legislature haven’t been able to agree on a spending plan for two years, the state has a record $15 billion of unpaid bills, prompting a lawsuit from Medicaid recipients who argue the impasse puts their health care at risk.

….
Not Enough To Go Around

Until a budget is enacted, the state should pay $586 million a month to Medicaid providers to keep the backlog from increasing, and an additional $500 million a month for four months to lessen the backlog, lawyers for the Medicaid recipients said in court filings this week. The actual burden on the state would be closer to $543 million a month because of federal matching, the filing said.

In response, lawyers for the state said in their own filing that the Comptroller offered to try to come up with $75 million more a month in negotiations with plaintiffs after Lefkow’s ruling, but that the plaintiffs refused that offer and are now demanding “100 percent” of the backlog.

A lawyer for the state attorney general said in a filing that should the court find for the plaintiffs, the state could not make “the monthly $593 million in statutorily mandated pension payments” but would also need to cut another $107 million from other core obligations. A sworn statement from the state’s assistant comptroller, Kevin Schoeben, verified that claim.

BUT TRUMMMMMP! Oh, this started well before Trump came around.

So we’ve already seen damage to these third parties, and I would expect more of this.

WHAT WILL NOT BE AN OUTCOME

1. Federal bailout

Good luck with that one. After the last big bank bailout, done with a Congress that was controlled by Democrats, with McCain grandstanding while running for President against Obama, the appetite for big bailouts is extremely low. Obama claimed that the banks ultimately paid the money back, and Politifact calls it mostly true, but I don’t think anybody cares.

Right now, there’s a President Trump, a Republican Congress… and no bailout will be forthcoming til 2019 at the earliest… and even then, it’s iffy.

Detroit wasn’t bailed out when it was staring at bankruptcy (and actually went bankrupt). That was the biggest bankruptcy. Puerto Rico isn’t getting much – just allowed to do a certain kind of bankruptcy (and a lot of which is in dispute, and involves PR losing control of a bunch of things.)

You think Illinois would be bailed out? Or even Chicago?

Nope, not gonna happen in the next couple years.

2. Federal bankruptcy process for states.

You may think the following belongs with the prior item, but no.

Will Illinois Need a Federal Bailout?

A question no one’s asked out loud with regard to the ongoing Illinois state budget negotiations is what happens if—or when—the state becomes unable or unwilling to pay its bills a few years down the road.

….

While bondholders fear—and Illinois’ pensioners would presumably welcome—a similar resolution should Illinois go bust, the more important precedent established by Puerto Rico is that when the federal government gets involved, the state’s constitution will get tossed aside. And that should worry both pensioners and taxpayers.

Sigh. Bankruptcy is not a bailout. I’m tired of this shit. Looking at the text of the piece, it doesn’t claim so — it’s the idiot editor who titled the piece. I feel sorry for the author.

Such a scenario may not be too far away: The next recession-cum-stock market correction will cause the state’s tax revenues—as well as its pension fund value—to fall precipitously, the latter probably to a point where no achievable rate of return on the remaining pension funds could achieve solvency. Such a development could make it impossible for the state to borrow money at any rate, and the federal government would be forced to intervene. Should that occur, it’s a safe bet that everyone will share in the pain—taxpayers, bondholders, and public pensioners alike.

No, the federal government does not have to intervene. Nothing can force the feds to do anything to intervene, and I will leave this whole bankruptcy argument for a later time.

This piece from Rick Moran seems to equate bankruptcy with bailout, too

CHECK OUT THAT LEGISLATIVE ACTION!

Mish explains the concept of Illinois progress:

Progress Illinois Style

1. Illinois has been without a budget for two years and its bonds, already the lowest in the nation, face a downgrade to junk.
2. On June 15, Illinois Governor Bruce Rauner called a special 10-Day legislative session to finalize a budget.
3. We are now in the eighth day of the special session.
4. The Special Sessions Cost Illinois Taxpayers $50,000 a Day.
5. The special sessions have lasted from 10 to 23 minutes at the longest.
6. Progress was announced yesterday: My sources tell me that by an 84-0 vote, part of I-55 will be renamed the Obama Expressway.

To add to the graph the other day, I’ve got two more days’ worth Day 7 and Day 8

The day-by-day:

The cumulative:

Oooh, the House has become even more efficient! And the Senate has broken through 1 hour of cumulative time! Working!

One outcome, btw, I didn’t mention above is that Rauner says he will extend the special session until a budget is passed.

Illinois Governor to Extend Session if Lawmakers Miss June 30 Budget Deadline
State has been deadlocked over budget for nearly two years, faces debt downgrade to junk status

Illinois Governor Bruce Rauner has this message for legislators as they struggle to deliver a budget to him by Friday’s deadline: No one leaves the capital until a deal is done.

“If the legislature fails to send a balanced budget package to my desk by Friday, we will have no choice but to keep them in session until they get the job done,” Mr. Rauner, a Republican, said in a statement Wednesday.

The warning comes as Illinois lawmakers spent Wednesday in negotiations trying to end a two-year budget stalemate that has led to a nearly $15 billion backlog of unpaid bills and economic pain across the state.

Steve Brown, the spokesman for Democratic House Speaker Michael Madigan, said many Democrats believe that Mr. Rauner isn’t negotiating in good faith and contrary to his rhetoric, has no intention of signing any deal.

Mmmhmm. Seems to me that Madigan hasn’t done anything the way in negotiating at all.

Other stories:

ABC7Chicago: Running on empty: How Detroit’s bankruptcy judges see Illinois

Chicago Sun-Times: As negotiations drag on, Rauner and Madigan go their own ways
Illinois News Network: Speaker Madigan unveils House budget plan that also relies on massive tax hike
Illinois News Network: Lucci: What will Illinois look like if Madigan wins?
Illinois Policy Institute: The history of Illinois’ fiscal crisis
Illinois Policy Institute: MADIGAN’S SPENDING PLAN IS UNREASONABLE
Illinois Policy Institute: ILLINOIS REPUBLICAN SPENDING PLAN INCLUDES MILLIONS OF DOLLARS FOR SUBURBAN PROJECTS
Illinois Review: IVES OP-ED: IN THE END, WHAT WILL SPEAKER MADIGAN AND THE DEMSMACHINE GAIN?
Northwest Herald : Mike Madigan’s power over paralyzed Springfield

A DARK IDEA

Last, from Truth in Accounting: A modest new proposal for what to do with Illinois

In recent days, some creative and/or silly proposals for dealing with the blooming financial disaster known as “Illinois” have bubbled up.

Pundits have suggested everything from combining Illinois with Indiana (Indianois), or allowing its neighbors to swallow up parts of the state.

Here’s another idea, as long as we are thinking out of the box.

We can turn Illinois into a hole.

Illinois is already in a hole – a financial one. Why not just reflect reality?

Oh reality doesn’t need reflection. It will show up on its own.

Compilation of Illinois posts


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