Illinois Budget: What It Does And Doesn't Do (Surprise Giveaway To Muni Bondholders?)

Tyler Durden's picture

Authored by Mike Shedlock via MishTalk.com,

Illinois now has a budget, the first in three fiscal years. An excellent writeup on The Stump entitled Illinois Financial Disaster: Even More Reactions to the Budget explains what passage of the budget does and does not do.

Here are some links mentioned by The Stump and a few additional links and comments by me.

The Budget Fixes Nothing

Mark Glennon at Wirepoints comments on the Many Ways Illinoisans Won’t Pay Higher Taxes

It’s not just that people are leaving because of taxes, though that’s probably the biggest problem. Long before last week’s tax increase over half of Illinoisans were telling pollsters they wanted to leave the state, citing taxes as the biggest reason.

 

Remember how the deniers a few years ago ridiculed what was then just anecdotal evidence of people leaving, especially big taxpayers? Census and tax data eventually backed it up. This is no different.

 

It’s happening within Illinois, too. People will shop where sales taxes are lower because those rates have become so meaningful to them. One reader told me about how busy the take out Peapod location is in Deerfield, Lake County. Cook County shoppers are going there, just across the county line, to take a couple points off their sales tax.

 

As for me, I’m writing this from a house in southeastern Wisconsin my wife and I bought recently. I figured we’d get ahead of the escape-from-Illinois crowd that’s increasingly feeding demand here. If Illinois doesn’t adopt the radical changes it needs by the time my youngest graduates from high school there, I’ll make this my permanent home — like so many Illinois ex-pats I’ve met here have done. In the meantime, we’ll buy our groceries here often, where they’re exempt from any sales tax.

 

Illinois’ tax collections have already been dropping. Last week the state released its report for the fiscal year that ended June 30. Tax receipts declined 3.2% — almost $1 billion from the preceding year.

 

I think we are well past the top of the curve — the point where higher rates result in less tax yield. Sure, tax receipts will surge for a few years. Maybe the state will get the $5 billion per year it claims — at first. It takes time to move or adapt in a way that reduces your taxes. But it won’t hold up. Too many people are too furious. They won’t pay, one way or another.

Not Even Balanced

Legislative Democrats boast that the $36 billion budget they approved is not only $1 billion less than Rauner himself proposed, but $3 billion less than the “autopilot” government spent annually. But Rauner’s administration complains the budget still is $1 billion or more out of balance.

So they’re spending $1 billion more than they expect to take in as revenue. That’s a 3% gap, which does sound small, until you realize that a bunch of these small, and not so small, annual gaps have accumulated as state debt. Which is a hell of a lot bigger than $1 billion.

It Doesn’t Fix Pensions

Joe Cahill at Crain’s Chicago says New Budget Threatens to Deepen Pension Debt

Lawmakers in Springfield appeared to face up to Illinois’ grim financial realities when they passed the first state budget in three years. The spending plan approved over Gov. Bruce Rauner’s veto does take a few steps to address deepening fiscal woes ignored during years of political stalemate between the governor and Illinois House Speaker Michael Madigan. It brings a measure of relief to state vendors owed $15 billion in unpaid bills, and might stave off a downgrade of Illinois bonds to junk status.

 

When it comes to the state’s gravest budgetary peril, however, the 2018 budget is another exercise in denial and can-kicking. Legislators did nothing about unfunded state employee pension obligations estimated at $130 billion, an albatross that will surely drag Illinois under unless aggressive action is taken to reduce the shortfall. In fact, the new budget could even enlarge the pension funding sinkhole.

 

State contributions to pension plans will decline $1.5 billion in fiscal 2018, by far the largest single spending cut in the budget. And some $900 million of that reduction reflects wishful thinking about future investment returns at state employee pension funds.

 

For years, Illinois failed to make contributions sufficient to fully fund obligations to future retirees. Only recently did the state step up contributions. But now Illinois is taking a step backward. Even in a best-case scenario, smaller contributions will slow the return to pension solvency. And the enormous pension shortfall will grow larger if the rosy return assumptions embraced by our political leaders don’t come true.

Got That?

The biggest budget cut is to pension funding. But Illinois has the worst-funded public pension system in the nation.

It Doesn’t Fix Workers’ Comp

Forbes explains How Illinois Courts Are Bankrupting The State

Like every other state, Illinois has a system of employer-funded insurance for workplace injuries. This is a safety net that every worker—in the private and public sectors alike—receives. Under workers’ compensation laws employees give up their right to sue and potentially win large awards in exchange for more modest but speedy compensation; and employers are liable no matter whose fault caused the injury, in exchange for limits on their liabilities. For the last 100 years, this regime has been working nicely in most states.

 

But not in Illinois. The commission handling workers’ claims and the courts that supervise it have endlessly expanded the liability of employers, forgetting that the system was supposed to cover only employment-related injuries. One Illinois court held, for example, that a worker was entitled to benefits when he was injured throwing himself up against a vending machine in an attempt to dislodge a stubborn bag of potato chips. The court said that the injured employee was a deserving “Good Samaritan” on a rescue mission to help a fellow co-worker who had deposited the coins. The court thought that the defect in the vending machine “created a need for action to dislodge the bag of Fritos.” (I am not making this up!)

 

Illinois courts are generous to workers even when it defies common sense. A firefighter that was injured when he was out of town for a seminar and engaged in “horseplay” with a fellow worker in their hotel room (“wrestling like two oversized kids”) succeeded in persuading a court that the injury is work-related. Numerous employees have had great success receiving lifetime benefits for degenerative injuries like carpal tunnel syndrome, even when it was proven highly unlikely that they were caused on the job. Ex-workers often continue to receive lost wages awards after returning to work elsewhere!

 

Illinois’ bottomless workers’ compensation system has contributed to the state ranking as one of the most labor-expensive states. In the construction industry, for example, $20 of every $100 of wages goes to workers’ compensation (in neighboring Indiana it’s less than $5). It is perhaps one more reason why the state has lost 300,000 manufacturing jobs since 2000, and why, unlike its Midwest neighbors, it has not enjoyed any manufacturing job growth since the Great Recession.

It Doesn’t Fix Medicaid

During the two-year budget battle, Illinois added to its total of unpaid bills. That total is now $15 billion including $2 billion in unpaid bills owed to Medicaid doctors and hospitals. A federal court in 2015 ordered the state to pay the Medicaid bills, but cash-flow problems have made it difficult for the comptroller’s office to find the cash to make the payments.

In June, the Chicago Tribune reported Medicaid patients to ask judge to make Illinois pay its bills faster.

If the Republican version of Obamacare reform actually does pass, Illinois Could Lose $40 Billion in Federal Medicaid Support over the next ten years.

Illinois Health and Hospital Association spokesman David Gross testified that Illinois would lose at least $40 billion in federal Medicaid funding over the act’s 10-year lifespan. The association arrived at this figure by taking Illinois’ share of the nation’s Medicaid expansion population and multiplying it by the $880 billion in reductions estimated by the nonpartisan Congressional Budget Office under the Republican plan. Gross said the cuts would jeopardize patient care.

 

Illinois currently devotes $10 billion in state funds each year to Medicaid, or about one-quarter of the state’s general fund. The federal government currently matches that amount.

Mish note: The one-quarter spent on Medicaid does include matching federal funds.

Medicaid Spending Up 141% Since 2000

The Illinois Policy Institute reports Health Care Costs Consume 25 Percent of Budget.

Illinois state-worker pension costs get well-deserved attention for crowding out spending for much of the state’s other services. With pension costs now consuming more than 25 percent of the budget, they compromise spending on everything from social service providers to in-state college scholarships for low-income students.

 

But there’s another budget item that deserves similar attention for the squeeze it’s putting on other government services: Medicaid. Health care costs largely made up of Medicaid expenses consume 25 percent of Illinois’ general fund budget. The governor’s recommended 2017 budget appropriated $8.2 billion to health care out of an expected $32.1 billion in general fund revenues. Without serious Medicaid reforms, spending will continue to compromise other programs that help the needy.

 

Medicaid, a state-federal partnership originally meant to be the health care safety net for the poor and disadvantaged, has ballooned to cover more than a quarter of Illinois’ population. It’s no longer just a safety net.

 

In 2000, just 1.37 million, or 11 percent, of all Illinoisans were enrolled in Medicaid. Today, enrollment has swelled to 3.22 million – a 135 percent increase.

 

As the number of Medicaid enrollees has increased, costs have increased as well. Since 2000, total general revenue fund, or GRF, and GRF-like Medicaid costs have increased by $7 billion. That increase alone is nearly what Illinois state government appropriates for K-12 education each year.

Chicago Sweetener

Greg Hintz at Crain’s Chicago Business explains State budget deal contains a junk-free sweetener for Chicago

The city of Chicago may be able to end junk status on much of its debt—potentially saving $100 million or more in interest charges each year—thanks to a clause that was quietly tucked into the state’s new budget.

 

The provision will allow home-rule entities such as Chicago to separate out money they get from the state from other receipts and use that dedicated revenue to pay for new debt, or to pay for retiring old debt.

 

The city now gets well over $1 billion from the state each year, including $630 million in sales taxes collected by the Illinois Department of Revenue on the city’s behalf, the $368 million city share of local income tax receipts, and $71 million in motor fuel taxes.

 

City officials hope the provision will allow them to save as much as 3 full percentage points—300 basis points—compared to what junk-level city general-obligation debt now costs. With more than $8 billion in outstanding general-obligation debt, the city would save $30 million a year on each $1 billion that could be refinanced, assuming it indeed can sell such “statutory lien” debt at the lower rates.

 

Saving $100 million a year would about equal the annual recent increase in the city’s property tax levy.

 

Bond experts and financial watchdogs say that while the scheme is not perfect and does not in itself reduce tens of billions of dollars in unfunded city pension liability, the clause has considerable potential.

 

The measure specifically allows home-rule municipalities to assign to debt repayment regular revenues received from the state, and obligates Illinois officials not to interfere in any such deals. But for the new plan to work, the state revenues involved must go directly to debt repayment and not into general city coffers.

Outrageous Giveaway to Muni Bond Holders

Mark Glennon at Wirepoints says Outrageous Giveaway to Muni Bond Buyers Hidden in Massive Budget Bill.

Guess what was hidden in the 756-page Budget Implementation Bill that just became law in Illinois?

 

It’s roughly the same as the “bill that must be stopped,” as we called it earlier. That was Senate Bill 10, the bill about which I wrote this:

 

When I practiced law I taught secured lending and bankruptcy as an adjunct at the University of Texas Law School. I can imagine giving an assignment like this: “Draft a bill to make bondholders supreme by stiffing the public and taxpayers.” If somebody handed in Senate Bill 10, they’d get an A+.

 

It’s a naked asset grab at the expense of citizens designed to allow municipalities to kick the can by borrowing more and giving first dibs to municipal bondholders on public assets.

 

It’s the ticket to an assets bankruptcy, which is the worst of all conceivable outcomes for broke Illinois towns and cities, including Chicago.

Stump Response

My first reaction: yes, bondholders do want to get paid.

 

Otherwise, they wouldn’t buy the bonds. Duh.

 

But my second reaction was to wonder just how strong this particular legal protection is.

 

We’re already seeing in Puerto Rico that they’ve been trying to get out of various guarantees that were supposed to make newly-issued bonds bankruptcy remote. But now that they’re in their morass, seems that the political actors are trying their damnedest to make sure the politicians, employees, and retirees get the money, and not the bondholders (though, of course, some bondholders are also retirees. Who exactly are buying these bonds, I wonder.)

 

My third reaction was: exactly how difficult would it be to enforce that “non-impairment” rule against the state?

 

As noted in Hinz’s piece, we’ll see if Chicago takes this particular lifeline.

 

But here’s the real deal: paying for pensions and debt isn’t as sexy as paying for shiny new toys. I assume a lot of shiny new toys will be bought if the debt pressure is lightened. I do not trust one whit that there will be any fiscal sanity from Chicago or Illinois.

 

And I agree with Glennon that this is an awful idea because it doesn’t do anything for the structural financial problems for the cities or state. It makes the ultimate crash that much worse when it does come.

Expect Lawsuits

It’s difficult to project precisely where this goes other than to the courts.

When some of these bond and pension schemes implode, which they are guaranteed to do, a cascade of lawsuits over the precise meaning of every word in the legislation will ensue. Questions also arise over older bonds vs newer bonds.

In the end, when cities default, the bondholders will expect to get paid and the pensioners will expect to get paid. Both will not happen.

I expect the pension crisis to hit before 2020 so we may not have too long to wait.

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Ghost of PartysOver's picture

And the Idiot Class gets what they voted for and deserve.  Expecting a pension form the State Gov?  No going to happen when Wall Bond Holders are at the front of the line.  Expecting State funded Healthcare?  Not going to happen when Wall Street is at the Front Of the Line.   Kids, hell they don't need no stinking education.  Could this really be the Death Spiral of a State?

Creepy_Azz_Crackaah's picture

But... but... but... The Bern Feel tells me that FREE $HIT FOR EVERYBODY(!!!) works and is the best system that there is.

Must be those EEEEEEeeeebil capitalists and small gubmint types causing this budget problem.

And, BTW... If you are fleeing Illinois becasue you're getting screwed by the gubmint that YOU VOTED FOR, don't flee to my state and fuck it up with your FREE $HIT voting habits.

Countrybunkererd's picture

Re-read that Workers Comp again.  I sat in on a meeting well over a decade ago RE a discussion of Chiraq's city WC issues took place.  There was a case where a bus driver was in an accident (a mere fender bender, no physical injuries) and the bus driver was out on WC for over 13 months for psychological trauma.  The money spent then was staggering and i cannot imagine how bad it is now with ever more lawlessness.

NoDebt's picture

It's over for Illinois and everyone knows it.  This is the last giant corruption grab before the wheels come off.  No point in not stealing while the stealing is good- there won't be much left to steal shortly.

 

Alt_Right_Girl's picture

Give it some time, then when the state regresses to african level civilization we can colonize it all over again.

And remove all pests this time. 

Illinois Democrats Want to Move from “Junk” Status to Junkie Status to Save their Economy


Michigander's picture

Should be spelled ILLANNOY...

Déjà view's picture

IL. hangs at top center of US as Sword Of Damocles...ready to rip out Americas heart...

Buckaroo Banzai's picture

Illionois is now a bust-out, one of the oldest mob games there is.

https://youtu.be/ZXcBvq2Jscw

https://youtu.be/WeK9e07Y65o

halfasleep's picture

he who steals first steals best.

Crash Overide's picture

Illinois is full of old liberal Hillary supporters, they won't have enough depends for the shit show that is coming. I will be watching from Wisconsin as they dine on cat food wondering how it all went wrong...

a Smudge by any other name's picture

Yup it's a bustout. Illinois and Sears. Every last drop of blood.

Bastiat's picture

"Bond holders do want to get paid..."  then why don't they buy quality paper?  Chasing yield is a choice.

DjangoCat's picture

With first dibs on the real assets, they will clean up on the good stuff at firesale prices.  Have we seen that happen before?

Bastiat's picture

Upcoming "Bond Buyer" webinar:  July 26, 2017

"Why disclosure really matters now - The S.E.C. Enforcement
Agenda"

Topics to be Discussed in the Webinar:

  • What are the Priorities of the Public Finance Abuse Unit
  • What Sanctions Can the S.E.C. Bring Against Issuers, Underwriters, Their Officers and Officials
  • Summary of Recent S.E.C. Enforcemnt Cases - What Ptterns Can We Find?
  • Recent Increases in Exposure of and Enforcemnt Against Public Officials
  • How Should An Official Respond if Contacted by the Public Finance Abuse Unit

-------------------------------------

Suggested disclosure for new Illinois bonds:

WARNING: THIS BOND IS TOTAL SHIT! IT IS LIKELY TO DEFAULT ON THE FIRST INTEREST PAYMENT DATE AFTER THE CAPITALIZED INTEREST RUNS OUT.  IF YOU PUT THIS THING IN YOUR PORTFOLIO, SURE, YOU'LL BUMP YOUR YIELD FOR A BIT BUT MAKE SURE YOU HAVE ANOTHER JOB BEFORE THE CAP I RUNS OUT. 

 

meditate_vigorously's picture

Fuck off. The entire election system in this country is a joke and sham designed to keep the filthy unwashed masses from every serving in office.
The sooner people are willing to admit that voting does not matter, the sooner we can move on.

The only reason I even vote now is to protest the 2 party candidates by voting for the local nobody.

And that still misses the point that this country was lost because of immigration watering down the electorate (from non-Anglo-Saxon Europe and then everywhere else). A nation is its People, and the USA ceased being a nation in the 19th century. It is beyond fucked by duhversity now.

Blankenstein's picture

I agree with the rest of your statement, but there is a large group of idiots in Illinois who fully support the conmen politicians here.  There is no need to fix the elections when you have a large group of low iq sheep willing to vote for you.

MoreFreedom's picture

It will be good if the former government employees get a big haircut.  It creates incentives for current government workers to ensure the state is well run, rather than run well to take from taxpayers for government employees with promises to take more from future taxpayers rather than setting aside the money for pensions when it is accrued like private firms do.

When a private firm's pension is underfunded, the management goes to jail, while the employees take a haircut.  It should be the same for IL because its customers, the taxpayers, are like the private firms customers.  They don't pay for the pension shortfall.  I just don't expect the politicians to jail each other which is the only difference.  The voters will, or should, put them out of a job. 

Cordeezy's picture

Shocking a bunch of politicians produced 750 pages that fixes nothing.

 

 

www.escapeamazon.com

 

 

youngman's picture

What is amazing to me is that they have to sit in little meetings and think these games up to get around the problem.....its really criminal...they have to sell more debt to keep going...cant pay off what they have...but to sell new you have to make it viable.....and the so called guarantee will do that...and idiots will buy it..

Stuck on Zero's picture

The politicians didn't write. They're mostly illiterate. All 750 pages were written by lobbyists. Same everywhere.

Bay of Pigs's picture

Just a flesh wound right?

DjangoCat's picture

Yeah, but looks like a bleeder.

Mike Masr's picture

Chicago is a sanctuary city. Go to neighborhoods and almost half the population is Mexican that cannot even speak English properly. The illegal parasites are draining the system on healthcare, education, and welfare. This does not even touch on the crime. The Maniac Latin Disciples "MLD" based on the northwest side near Albany & Grace Street is comprised mostly of illegals. They beat up people on the street, steal catalytic converters, invade homes-burglary and rape women.   

Chicago is bankrupting Illinois!   

Lost in translation's picture

Unpossible!

George W. Caesar assured me that they're "just good-hearted people doing the jobs Americans won't do."

And Kevin De Leon told me "no human beings are illegal."

And we're supposed to believe that unassimilated, unskilled, unemployable, uneducated, illiterate, and occasionally diseased Third World people from countries drowning in violence are not a blessing from Heaven!? That's just crazy, racist talk! Stop triggering!

/SARC

venturen's picture

at least mexicans will work hard...for under the table money unlike another segment of the population there

markitect's picture

until the jobs over and they file an unemployment claim against you and then get a bus stop lawyer to sue you for wage theft and sick the IRS on you.  Dont kid yourselves, these Mexicans know the system inside and out and a million ways to fuck you.  It took me a year to evict one of these fuckers, got me for over $16,000 in unpaid rent plus my legal bills.

Mike Masr's picture

Go to any northwest side Chicago Jewell Food Store. Women with babies in their arms (no men) followed by a swarm of toddlers. Two to three shopping carts packed with food. They use Link Cards or whatever that food stamp bullshit is called to pay for their food. The hispanic cashier has to talk with them in Spanish because they dont speak a single word of English. Wonder if these parasites are US citizens? Hard working, taxpaying citizens have to pay for illegal people coming here to bleed our system like a tapeworm.    

The Democrats run Chicago and these (illegals) are all voters that will be out at the polls voting for them!

 

DjangoCat's picture

Gotta go for the PMs.  Platinum, yeah!

a Smudge by any other name's picture

Heh heh heh yer one of the few that knows. ;)

Clock Crasher's picture

Fractional reserve lending combined with government mismanagement. 

Epic FAIL!

I hear the choppers coming.

in4mayshun's picture

They know the system is going to implode. Now the job is to stave off the day of reckoning until the other states catch up and they all sink at the same time. The solution? Global governance of course and a one-world currency.

GunnerySgtHartman's picture

The solution? Global governance of course and a one-world currency.

Oh yeah, like bigger government ever solved anything.  We know what bigger government and a universal currency got for the Roman Empire ...

MrSteve's picture

world-class orgies with imported wine and exotic women!

Ghordius's picture

there can't be a one-world currency... as long as the EUR is alive

there can't be a "global government"... as long as the european countries feel comfy in the EU, either

meh

DjangoCat's picture

And how comfy are they feeling now then?

Ghordius's picture

it reminds me the rants I made... in Greece, around 2001-2003

mismanagement is mismanagement, that simple

DjangoCat's picture

It is easy to blame the defaulter, but how does the dealer of addictive debt get off scott free?  In the war on drugs, it is (purportedly) the dealers who are targetted.  There is no war on debt that I can see.  

The war on drugs is a classic failure (distraction).  A war on debt would be jubilee.  Not going to happen with the bankers in charge.  What to do?

True Blue's picture

Not going to happen with the bankers in charge.

Easy answer if we had someone in position to do it: order the Treasury Department to start printing Silver Certificates to compete against FRN's. Just like China uses an international currency (the Yuan) and an internal currency (the Ren.) Since all debt is denominated in FRN's (and since the FRN would collapse into hyperinflationary junk overnight with any viable public alternative) the Bankers get left holding the bag whether they like it or not; and the various Gov'ts get to pay off their debts with toilet paper fiat while the new currency insulates the general public from the damages (to whatever degree is possible.)

besnook's picture

bankruptcy is the only way out. how do you short munis.

syzygysus's picture

This is a great model of the utopia the left promises.  Chiraq anyone?

venturen's picture

can of TNT kicked down the road...Mission Accomplished...Elect Obama Governor against his will 

GunnerySgtHartman's picture

I'm looking forward to Illinois being labeled "The Greece of America."  It's just a question of when.

bshirley1968's picture

http://www.zerohedge.com/news/2017-07-13/global-stocks-hit-new-all-time-...

Does anything else need to be said here?  Does it appear that anyone gives a shit about what is going on in Illinois? 

artvandalai's picture

This budget is brilliant. The article underates it. Several problems will be solved and things are looking up for Illinois. Now if you'll excuse me I see the Mother Ship just landed in my back yard to pick me up so I have to go.

Oreilly's picture

The pension crisis may not be as bad as it's made out to be. I remember reading somewhere about an Illinois school teacher who was scheduled to get annual ~$80K with medical when she retired, and she was upset because the state was messing with her money. Even if she only got half of that, she'd still have no worries as far as living out the rest of her life in comfort. The first thing to ask yourself about these government pensions is where the bar has been set as far as what a fully funded pension is, and then what only getting a percentage of that means. Most government pensions have been manipulated higher by the fox watching the hen house (management, who get pension benefits, negotiating with labor, who get pension benefits, raising the amount of benefit but not having to take responsibility because the bill doesn't come due until they've retired and are somewhere else collecting the benefit). Hopefully no one starves, but I for one could care less if a retired school teacher has to live on $30-40K per year.

Blankenstein's picture

Not sure why the down vote.  Only 15% of private sector workers receive pensions, so having a pension is a rarity.  

Do they really think that it is possible for the private sector workers who earn less than the Illinois .gov workers and don't receive penions, to fund these top 5%er pensions that are paid out for years, as these .gov workers are able to retire with full penions in their 50s?  

rejected's picture

Oh yea,,, those all important public pensions!  Government BS and greed destroyed private pensions  But do away with pensions paid by someone else,,,OMG!. Perish the thought.  Nobody around to save private pensions, but there's always the taxpayer to gouge for public pensions. Their so accustomed to stealing and living off OPM it is now their second nature.