Illinois Budget Out of Balance Again: Solution More Junk Bonds

An Illinois "Road Show" touts more junk bonds as a solution to a perpetual budget crisis. What a bunch of garbage.

The State of Illinois Confirms, New Budget Out of Balance by $1.2 Billion.

In the preliminary official statement to potential bond buyers dated Aug. 16, the Governor’s Office of Management and Budget, or GOMB, notes the fiscal year 2019 budget is out of balance by $1.2 billion. Furthermore, the report states, “The State provides no assurances as to how, when or in what form this structural deficit might be addressed.” The statement was released as part of the state’s plan to sell over $920 million in new general obligation bonds.

The Illinois Policy Institute projected the General Assembly’s spending plan was out of balance by as much as $1.5 billion shortly after the bill was made public.

Lawmakers also took no action to address the two primary factors leading to the state’s near-junk credit rating: a massive backlog of unpaid bills, which stands at nearly $8 billion as of Aug. 20, and roughly $130 billion in unfunded pension liabilities.

To make the budget appear balanced on paper, lawmakers relied on a number of common but deceptive budget gimmicks, including:

  • Ignoring a potential $412 million in automatic raises for government union workers resulting from a contract dispute between Gov. Bruce Rauner and the state’s largest employee union, the American Federation of State, County and Municipal Employees
  • Counting on $300 million in revenue from divesting the James R. Thompson Center – planned for the third year in a row – despite no concrete signs of progress in selling the building
  • Sweeping and borrowing $800 million from other state funds, in violation of good budgeting practices
  • Using accounting methods that mask the true size of deficits
  • Counting on around $422 million in pension savings that are entirely speculative

Solution: Still More Junk

An "Illinois Municipal Bond Road Show" offers still more Junk masquerading as bonds just above junk.

Bond Grades

  • Baa3 is Moody's lowest investment grade bond, one step above junk.
  • BBB- is S&P's lowest investment grade bond, one step above junk.
  • Fitch is a bigger rating whore than the other two, placing the offering at BBB.

To win placement deals with the state, Fitch rates deals one notch higher than the other rating agencies.

Update on Accounts Payable

Here's an interesting chart on money the state owes vendors.

To pay down what the state owes vendors, Illinois issued bonds and it also transferred money from one bucket to another.

The state brags that "As of June 30, the backlog was $6.8 billion, $900 million less than the projected backlog of $7.7 billion."

Curiously, roadshow page 6 states "As of August 1, the bill backlog was approximately $7.4 billion."

GO Debt Service

How Illinois Spent the Money

Note that over half of existing bonds have nothing to do with capital investment improvements.

Of the $29.7 billion in existing bonds, $9.9 billion was used to shore up pensions, and $6.0 billion to pay vendors money owed.

The state still owed vendors $7.4 billion as of August 1.

Hmm. Let's do a quick check on that amount via the Illinois Backlog Voucher Report by state comptroller Susana Mendoza.

Backlog Recap

  • Illinois owed vendors $6.8 billion on June 30.
  • Illinois owed vendors $7.4 billion on August 1.
  • Illinois owed vendors $7.9 billion on August 25.
  • In less than two months, debt owed to 99,577 vendors increased by $1.1 billion!

Pension Funding

And what about that $9.9 billion in pension bonds? Did it shore up the pension plan?

I am glad you asked. The road show explains.

Funding Synopsis

  • 39.8% Funded FY 2017
  • Fair Value Under-Funding: $129 billion!

Where precisely is Illinois supposed to get $129 billion?

Orwellian Comment

Meanwhile, Rauner’s Director of Capital Markets says “Illinois has a conservative debt structure”.

Mike "Mish" Shedlock

Comments
No. 1-7
Deter_Naturalist
Deter_Naturalist

In 9 years the total market cap of US stocks went from $8T to $30T. Total USD-denominated debt is reportedly $250T.

If my calculations are correct, $250 trillion in 100 dollar bills would weigh as much as (I kid you not) 4,907 of the largest supertankers afloat...FULLY LOADED.

We live in the shadow of Mt. Vesuvius. All these debts are a promise of a future cash flow, and given their unimaginable size, it is equally unimaginable how everyone will get stiffed.

RonJ
RonJ

I am wondering what the 180 degree mark is going to look like.

Six000mileyear
Six000mileyear

A vendor strike by providing no more services and firing all employees would put a stop to this charade VERY quickly.

stillCJ
stillCJ

Editor

"To win placement deals with the state, Fitch rates deals one notch higher than the other rating agencies." Which is to say that Fitch is the biggest ratings whore. They all rate IL much too high; IL has become a bad joke; an Idiocracy. SO GLAD I escaped 13 years ago! Only problem is CA has become politically and tax-wise awful and soon I'll have to move again.

2banana
2banana

Public unions are the largest campaign donors of all time. They give 99-1 to democrats. Nothing will change.

Q. What is the first thing a public union employee from Chicago does when they retire?

A. Moves to a low tax right to work state.