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
- 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.
- 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!
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.
- 39.8% Funded FY 2017
- Fair Value Under-Funding: $129 billion!
Where precisely is Illinois supposed to get $129 billion?
Meanwhile, Rauner’s Director of Capital Markets says “Illinois has a conservative debt structure”.
Mike "Mish" Shedlock