Illinois has long been the poster child for a dysfunctional state fiscal policy.
The state’s Republican governor, a formerly wealthy businessman, and the Democratic-controlled legislature have been perpetually locked in a race to the bottom as the Land of Lincoln has repeatedly flirted with near- bankruptcy and junk-bond level credit ratings.
Last week, the state marked the second full year in which Gov. Bruce Rauner and a combative Democratic legislature were unable to agree on a new operating budget.
The state Senate the week before rejected a House-passed budget measure premised on a $7 billion revenue shortfall after Rauner threatened to veto it.
Unlike city and county governments, states cannot legally declare bankruptcy as a means of shedding debt by forcing creditors, bondholders, and government retirees to absorb some of the loss. The last time a state declared bankruptcy was in 1933, in the throes of the Great Depression, when Arkansas defaulted on its debts.
But some legal scholars and government experts have argued in recent years that a well-orchestrated bankruptcy might be a far better solution than a federal or taxpayer bailout, and it would likely protect pension programs and health insurance from draconian cuts.
In April, a senior official at S&P Global Ratings, a premier government credit rating agency, warned that nearly a dozen states with festering budget problems and woefully underfunded employee pension programs are struggling through “chronic budget stress” that could push them to the brink.
David Skeel Jr., a University of Pennsylvania law professor who has long championed granting federal bankruptcy protection to states, told Bloomberg that “Bankruptcy lets you get ahead of the problem.” And if ever there were a perfect candidate for such an approach, it would be Illinois.
Illinois has the dubious distinction now of being the only state to have operated without a complete and balanced budget for the past 700 days. Instead, it has been forced to conduct business under court-ordered spending and stop-gap measures while running up a massive deficit. For years dating back to Democratic rule in the State House, Illinois has led the nation in state budget shortfalls, pension fund crises, and unpaid bills to public universities, schools, social service agencies and government vendors.
As of last week, little had changed. The state was responsible for a record backlog of unpaid bills totaling $14.7 billion, causing fear among programs and local agencies dependent on state aid. State legislators also failed to approve a stand-alone kindergarten through 12th-grade education budget that was vital to the operations of the financially struggling Chicago school system, Reuters reported. A $15.7 billion bill to ensure schools open in the fall passed the Senate but was soundly defeated in the House.
Rauner, who won election three years ago vowing to run the government like a business, complained to reporters as the legislative session ended, “We’re like a banana republic. We can’t manage our money.” He has used this same analogy before to voice his frustration working with a Democratic party that is prone to internal disagreement as well as strong differences with the conservative GOP governor.
What’s more, the state’s ragged financial picture has been steadily driving down its credit ratings with Moody’s and Standard & Poor’s while driving up its interest costs in borrowing to somehow prevent the state from going bankrupt.
The current budget deadlock has sadly boosted the chances of Illinois becoming the first state relegated to junk-bond status, according to Bloomberg. The state’s 10-year bond yields last week soared to about 5.2 percent or 3.36 percentage points more than top-rated municipal debt. That suggests that over time the state must pay much higher interest rates to market bonds of declining value. Matt Fabian, a partner with Municipal Market Analytics Inc., told Bloomberg, “After those downgrades, it became extremely likely that it goes below investment grade” or junk status.
The state’s budget crisis was exposed in January 2011, when then-Democratic Governor Pat Quinn and the Democratic-controlled state legislature rushed to enact a major tax increase to address a looming deficit of at least $12 billion – which was roughly about a third of the entire $35 billion general fund budget. At the same time, the state employee pension fund was underfunded by $90 billion, and the state’s once-sterling credit rating was in rapid decline.
Illinois experienced the worst state budget crisis in the country, and that proved to be the political undoing of Quinn. The once highly popular Democratic governor was ousted in 2014 by Rauner, who spent $20 million of his own money on the campaign. Rauner branded Quinn’s six years in office a “failure,” especially his leadership in budgeting, taxes, and education.
Just as President Trump would do two years later in his campaign, Rauner boasted of his shrewd talents as a businessman and investor. He vowed to apply his keen business sense and instincts to running the state government. Today, things are no better.
The latest fiscal crisis flare-up in Springfield coincided with similar signs of dysfunction and discord in the nation’s capital. Trump and the Republican-controlled Congress are at odds on budget and spending priorities, health care reform and tax policy, and even the timing for raising the debt ceiling to avert a first-ever default on Treasury borrowing.
Congressional Republican leaders and the White House repeatedly have voiced confidence that they can work out their differences and pass major legislation this year. But the situation in Illinois offers a bracing warning of how complicated and politically charged budget issues can spin out of control.
This story was originally published by The Fiscal Times.
Illinois is grappling with a full-fledged financial crisis and not even the lottery is safe – with Republican Gov. Bruce Rauner warning the state is entering “banana republic” territory.
Facing billions in unpaid bills and pension obligations, the state is hitting a cash crunch that is rare even by Illinois standards.
A top financial official just warned 100 percent of the state’s monthly revenue will be eaten up by court-ordered payments. Rauner is calling a special session of the Democrat-led General Assembly in a bid to pass what he hopes will be the first full budget package in almost three years.
And Illinois will – literally – lose the lottery if the budget fails.
The state lotto requires a payment from the legislature each year. The current appropriation expires June 30, meaning no authority to pay prizes. In anticipation of a budget deadlock, the state already is planning to halt Powerball and Mega Millions sales.
“It is disappointing that the legislature’s inability to pass a budget has led to this development and will result in Illinois lottery players being denied the opportunity to play these popular games,” Illinois Lottery Acting Director Greg Smith told Fox News.
“We’re like a banana republic,” Rauner said earlier this month, after the General Assembly failed, yet again, to pass a budget package by the regular session deadline. “We can’t manage our money.”
The governor has called for a special session starting Wednesday. The state so far is operating on a series of stopgap spending packages.
But the problems are years in the making, caused in large in part by the state’s poorly funded pension system— which led Moody’s Investors Services to downgrade the credit rating to the lowest of any state. The state currently has $130 billion in unfunded pension obligations, and a backlog of unpaid bills worth $13 billion.
Reports have suggested the statecould be the first to attempt to declare Chapter 9 bankruptcy — but under the law, that’s impossible unless Congress gets involved.
“Nobody here in Illinois is considering bankruptcy—first of all, it’s not allowed,” said Steve Brown, press secretary for Illinois House Speaker Michael Madigan. “Second of all, it would damage the reputation of the state and it’s just not necessary.”
U.S. Sens. Dick Durbin and Tammy Duckworth, both Democrats from Illinois, declined to respond to Fox News’ request for comment on whether they would consider getting involved in introducing a measure allowing state bankruptcy.
“Illinois is the fiscal model of what not to do,” Rep. Peter Roskam, R-Ill., told Fox News, while not commenting on the bankruptcy question. “This avoidance in behavior toward dealing with our challenges is what leads to the devastating impacts we are seeing today.”
Just last week, the Illinois comptroller, who is responsible for paying the state’s bills, warned the office would be paying out 100 percent of Illinois’ monthly revenue, leaving negative funds for “discretionary spending. ”
But Rauner claims the Republicans have a new plan that could remedy the state’s crippling financial situation.
“Republicans in the General Assembly have laid out a compromise budget that I can sign,” Rauner said, calling it a “true compromise.”
The plan incorporates reforms like property tax relief, term limits, and spending caps, which have caused an “ongoing confrontation” between Madigan and the governor, one Republican leader told Fox News, adding that the two have been in a “stalemate” since Rauner took office two years ago.
“Gov. Rauner inherited this financial mess when he took office, and his proposals have been met by resentment from the speaker,” Deputy House Republican Leader Dan Brady said.
Brady added, “we are asking that the speaker allow for a date and a vote before June 30.”
But Brown told Fox News the governor isn’t making enough concessions.
“He’s not walking many back—the financial issues are serious enough, and he’s forcing things that have nothing to do with state government,” Brown said. “The biggest problem here is that the governor keeps associating a lot of things that do not have anything to do with the budget.”
Rauner has pushed for structural reforms, government consolidation and pension reform—some components that were able to pass on the Senate side.
“The people and businesses of Illinois deserve stability, not this ongoing chaos,” Senate President John J. Cullerton, a Democrat, told Fox News. The Illinois State Senate approved a balanced budget before the initial May 31 deadline that “matches” the governor’s spending proposal.
If the General Assembly fails to pass a budget package, they do have an option to pass another stopgap package, which lawmakers say is an option, but “not a good one.”
“We have a very real deadline looming,” Senate Republican Leader Christine Radogno told Fox News. “The alternative to not finding a compromise will be devastating to Illinois.”
The Associated Press contributed to this report.
Brooke Singman is a Reporter for Fox News. Follow her on Twitter at @brookefoxnews.
Puerto Rico teeters on brink of historic bankruptcy as lawsuits mount
- Ambac, one of the largest insurers of debt issued by Puerto Rico, argues in its lawsuit that “the Commonwealth … continues to flagrantly disregard the rule of law.”
- Ambac seeks to block Puerto Rico from officially launching Title III, a court-supervised bankruptcy-like restructuring process.
- The restructuring of the U.S. territory’s roughly $70 billion in outstanding debt would be the largest in the history of the U.S. municipal bond market.
Tuesday, 2 May 2017 | 3:57 PM ETCNBC.com
The cash-strapped island of Puerto Rico was hit with several lawsuits on Tuesday just hours after a stay on litigation expired as the commonwealth failed to reach a restructuring agreement with its bondholders on its massive debt load.
In a suit filed by Ambac, one of the largest insurers of debt issued by Puerto Rico, the company argued that “the Commonwealth, egged on by the Oversight Board, continues to flagrantly disregard the rule of law” and is seeking a declaratory judgment that the commonwealth’s fiscal plan is unconstitutional and illegal.
Ambac is also seeking to block Puerto Rico from officially launching Title III, a court-supervised bankruptcy-like restructuring process. The restructuring of Puerto Rico’s roughly $70 billion in outstanding debt would be the largest in the history of the U.S. municipal bond market.
In a note issued Tuesday, BTIG analysts Mark Palmer and Giuliano Bologna said they believe Ambac’s “lawsuits represent the beginning of the municipal bond insurers’ pushback against Puerto Rico’s efforts to force its creditors to accept severe haircuts, and we would not be surprised to see similar litigation filed by Assured Guaranty and MBIA in the coming days.”
MBIA’s spokesman said, “The company has no comment regarding potential prospective legal proceedings, if any.” A lawsuit filed in June 2016 by National Public Finance Guarantee Corp., a wholly owned subsidiary of MBIA, against Puerto Rico will now be able to proceed, since the stay has expired.
It was put in place in order to allow for negotiations between Puerto Rico and its bondholders as mandated by The Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, which was enacted into law on June 30, 2016. That was a day before the island defaulted on nearly $1 billion of principal and interest owed to its creditors — including holders of the island’s general obligation bonds, which carry a constitutional guarantee on payment.
Assured Guaranty declined to comment.
Ambac, which backs a large variety of Puerto Rico-issued debt across numerous structures, also filed a suit challenging Puerto Rico’s clawbacks of revenue pledged to Puerto Rico Infrastructure Financing Authority rum bonds, which has resulted in multiple payment defaults and “forced Ambac to pay tens of millions of dollars” in claims covering bondholders’ losses to date.
Through Dec. 31, Ambac has paid out $63.3 million to holders of various Puerto Rico-issued securities that the monoline insures due to the island’s multiple defaults, according to regulatory filings.
A separate lawsuit brought by the senior bondholders of $16 billion of debt backed by sales tax revenues, or COFINA bondholders, argued that Puerto Rico’s plan to cut its total debt violates the constitution. It also accused the island’s government of partaking in an ongoing campaign to suppress the value of COFINA bonds in an effort to strong-arm the creditors into a renegotiation of their debt on “terms unfairly, unjustifiably, and illegally punitive.”
The lawsuits filed Tuesday could be the tipping point for the government of Puerto Rico and its seven-member oversight board — which was also put in place by PROMESA and tasked with overseeing the daunting challenge of restructuring the island’s debt — to officially push the island into a Title III proceeding, which could force creditors to accept unfavorable repayment terms.
In a statement released late Monday evening, Puerto Rico’s fiscal agency signaled that despite the stay expiring, it wasn’t going to rush into Title III.
“The Government is still engaged in meaningful conversations with certain bondholders and creditor groups and is hopeful that it will achieve constructive results from these talks even after the conclusion of the mediation and the expiration of the PROMESA stay.”
Title III would also put an automatic stay back in place, protecting the U.S. territory from further lawsuits.