Illinois Unpaid Vendor Backlog Hits A New Record At Over $16 Billion

Back in July, the state of Illinois narrowly avoided a junk bond rating with a last minute budget deal that included a 32% in hike in income taxes.  Republican Governor Bruce Rauner vetoed the budget and called it a "disaster," but both houses of the state legislature voted to override his veto.  Meanwhile, S&P and Moody"s were apparently both convinced that the budget deal was sufficient for the state to remain an investment grade credit and all lived happily ever after, if just for a few months.  Per CNN:

Illinois narrowly avoided becoming the first U.S. state ever slapped with a "junk" credit rating from S&P Global Ratings after it passed its first budget in more than two years.

The ratings firm removed the threat of an imminent downgrade for the fifth most populous state in the country on Wednesday, ruling that the Illinois budget deal has lowered the risk of a "liquidity crisis." Now the state is rated one-notch above "junk" territory, and S&P said the odds of a downgrade within the next year have "substantially diminished."

Back in July, S&P defended its IG rating by saying that the budget package brought the state"s revenue and spending closer to parity and "reduced the near-term uncertainty that had come to characterize its financial operations." 

Of course, if that"s true, then someone is going to have to explain to us why the state"s unpaid payables balance continues to balloon higher with each passing day and now stands at a record $16,046,145,423.20 according the comptroller"s office... 

...which is only a 3-fold increase over the past two years.

But, if you"re a resident of Illinois, or worse yet a pensioner in one of the state"s massively underfunded pension plans, Democratic Comptroller Susana Mendoza would like for you to know that there is no reason for concern as she has the perfect solution to the state"s debt problem: $6 billion in more debt.  Per Reuters:

The bill backlog is growing despite the enactment of a fiscal 2018 spending plan and income tax increase in July that ended a budget impasse between Illinois’ Republican governor and Democrats who control the legislature.

“What is going to take this backlog down is the borrowing,” said Abdon Pallasch, spokesman for Democratic state Comptroller Susana Mendoza.

A provision in the budget enacted by lawmakers over the vetoes of Governor Bruce Rauner authorized the sale of up to $6 billion of general obligation bonds to pay bills from vendors and service providers that are accruing late payment penalties of as much as 12 percent.

That said, Republican Governor Bruce Rauner points out that there is a small problem with Mendoza"s magical $6 billion debt cure-all, namely that there is no funding available to pay 12 years worth of interest payments.

But on Monday, the governor told reporters that the bonds do not solve any problem because lawmakers failed to set aside money to make principal and interest payments over the 12 years the debt would be outstanding.

“We need to come up with roughly half a billion (dollars) of cuts just to be able to service a bond offering,” he said, adding that he planned to meet with legislative leaders for discussion.

That said, we"re almost certain that if bondholders didn"t care about that near-bankruptcy experience back in July, they"re also not going to have any problem underwriting another $6 billion worth of debt that has no shot of ever being repaid.

And we"re pretty sure these guys won"t care either...

Illinois Tax Rate Soars 32% After Senate Overrides Governor Veto

Two days ago when we reported that the Illinois House had voted 72-45 to pass a 32% income tax hike (and a $36 billion spending plan), in an last ditch scramble to provide the state with its first budget in three years (or else suffer the first ever US downgrade to "Junk"), we said that "ultimately, the fate of Illinois" credit rating is now in the hands of Rauner, and whether and how fast his imminent veto is overriden."

We got the answer on Independence Day afternoon, when just around noon, first the Senate voted to approve the House tax hike and spending bill, then shortly after, Gov. Rauner - just as he warned he would - vetoed both the income tax increase and the budget bill and budget implementation bill....

I just vetoed Speaker Madigan"s 32% permanent income tax increase. pic.twitter.com/Hn5SPm0w2h

— Bruce Rauner (@GovRauner) July 4, 2017

.... only to be himself overriden moments later by the Senate, as it took the drastic measure to end a record budget impasse.

The 36-18 vote in the Senate on the tax hike came after a very short debate, and two days after more than a dozen Republicans in the House broke ranks with Rauner to join Democrats to support the plan amid growing frustration.

Needless to say, former PE titan, Bruce Rauner disagreed, and in his veto message to lawmakers said that "the package of legislation fails to address Illinois" fiscal and economic crisis —and in fact, makes it worse in the long run. It does not balance the budget. It does not make nearly sufficient spending reductions, does not pay down our debt and holds schools hostage to force a Chicago bailout." Rauner also noted he did not get the economic agenda items he had made a requirement to sign a tax hike into law.

"This budget package does not provide property tax relief to struggling families and employers. It does not provide regulatory relief to businesses to create jobs and grow the economy. It does not include real term limits on state elected officials to fix our broken political system" said Rauner, listing the issues from what he once dubbed his "turnaround agenda."

Gov. Bruce Rauner holds a press conference

It does however stave off the day of reckoning and potentially Illinois junk status downgrade.

The voting came as Illinois entered its third year without a budget amid Wall Street"s threat of a credit downgrade to junk status, potential layoffs of construction workers and with Illinois already booted from the Powerball and Mega Millions lottery games.

"We don"t have any time left," said Sen. Toi Hutchinson, D-Olympia Fields. She laid out what is at stake without a resolution, including the state"s credit rating being downgraded to junk status, road workers being laid off, and the dismantling of higher education and social safety net.

* * *

The tax hike and budget now head to the House, which also will have to vote to override Rauner for them to become law. But according to the Chicago Tribune, Democratic Speaker Michael Madigan said the House would not do so Tuesday, meaning the budget process will play out at least another day. The House is not scheduled to convene until 4:30 p.m., but attendance has been an issue as lawmakers had dispersed for the holiday. Still no surprises are expected:

"I think that the Senate vote is reflective of the vote in the House. I think it speaks to all the hard work that has been done by a bipartisan group in the legislature," Madigan told WICS-TV of Springfield after the vote. "My expectation is that the bills that the Senate just passed will become law and we will have taken a huge step toward correcting the financial imbalances of the state of Illinois."

Perhaps, although some have suggested that instead of hiking taxes, which will lead to a fresh exodus of taxpayers from both Chicago and Illinois (recall the Chicago population is already shrinking the most of any US city) what the budget should have done is slash spending. Of course, that is the last thing on the mind of legislators of one of America"s biggest nanny states.

In fact, quite the opposite: the accompanying budget plan, which the Senate also quickly approved 39-14, would have the state spend a little more than $36 billion, about $4 billion more than it currently takes in from taxes. In other words, Illinois just "saved" itself from default but assuring it would end up with even more debt.

* * *

Going back to the vote, as the Tribune adds, the 36 votes in the Senate was the minimum needed both to pass and override a veto. There are 37 Democrats in the Senate, but two voted no. They are Sen. Julie Morrison of Deerfield, and Sen. Tom Cullerton of Villa Park. Both likely will face a tough re-election challenge. Sen. Bill Haine, D-Alton, who has been undergoing treatment for blood cancer since February, traveled to the Capitol to vote for the plan. The critical vote belonged to Republican Sen. Dale Righter of Mattoon, who noted the damage done to Eastern Illinois University in his district.

"Every dollar that we throw onto the backlog of bills is a dollar the next generation has to pay for even though we got to spend it," Righter said. "That"s simply wrong, and that is the basis for which I support this."

* * *

So do today"s last minute Senate fireworks mean no Illinois downgrade to junk is coming? It remains to be seen: the movement after years of dysfunction was enough to delay the state"s credit rating from being cut to junk status by Wall Street ratings agencies Monday, though they warned that much rides on a final approval of the budget package.  Even then, S&P Global Ratings warned that long-term damage has already been done.

"Even with a budget, however, it"s likely that Illinois" finances would remain strained and vulnerable to unanticipated economic stress," the agency said. "In addition to having accumulated record amounts of payables, the state"s university system has been deprived of state funding since January 2017. If a budget is enacted, the degree to which it closes the state"s structural deficit, provides a pathway for addressing the backlog of unpaid bills, and its impact on cash flows, will be important factors in our review of its effect on Illinois" credit quality."

Meanwhile, on Monday Fitch called the weekend developments “concrete progress,” noting that it appears the legislature may have enough votes to override Rauner’s planned veto of the tax hike. S&P called the actions a “meaningful step.” Yields on the state’s 10-year debt have soared to 4.8 percent, 2.8 percentage points more than those of benchmark obligations. That’s the highest yield of all 22 states that Bloomberg tracks.

It would be the ultimate insult to Illinois if despite the last minute scramble, S&P were to do to the insolvent state what it did to the USA in August 2011, when despite the pleas of Obama, Geithner and the entire administration, it went ahead and did the unthinkable, when it downgraded the US from its vaunted AAA rating. In any case, it"s only a matter of time before Illinois slides not only to Junk, but to Default as well...

Illinois House Approves Historic 32% Tax Increase, Governor Vows Veto

With Illinois, which on Saturday morning entered its third fiscal year without a budget, facing a catastrophic downgrade, late on Sunday evening the Illinois House approved the most controversial element of a budget package, a tax hike which will increase the income tax rate by 32% from 3.75% to 4.95%, and the corporate income tax rate from 5.25% to 7%, to try and end a historic budget impasse. The bill passed 72-45. The House also approved a $36 billion spending plan minutes later on a 81-34 vote. According to the Sun Times, it cleared an initial hurdle on Friday with 23 Republicans voting “yes.”

“While no one could say this was an easy decision, it was the right decision,” House Speaker Mike Madigan said after the spending bill vote. “There is more work to be done.” Dems said they would work with Republicans on other resolution of other issues on table.

The proposed tax increase will now head back to the Illinois Senate, which approved a revenue bill on May 23 with all Democratic votes as part of its “grand bargain” package. But Governor Bruce Rauner has said he’ll only support an income tax hike if it’s limited to four years and paired with a four-year property tax freeze. He’s also still seeking changes in workers’ compensation and pensions.

Commenting on the just passed House bill, Rauner said he’ll veto the revenue bill.

“I will veto Mike Madigan’s permanent 32% tax hike. Illinois families don’t deserve to have more of the hard-earned money taken from them when the legislature has done little to restore confidence in government or grow jobs,” Rauner said.

“Illinois families deserve more jobs, property tax relief and term limits. But tonight they got more of the same." He also said in an emailed statement that “if the legislature is willing to pass the largest tax hike in state history with no reforms, then we must engage citizens and redouble our efforts to change the state."

Some commentators promptly countered that Rauner"s veto will likely be overriden.

The tax bill passed with some essential Republican support: it needed 71 votes. But Illinois House Republican Leader Jim Durkin questioned how it will address the state’s $14 billion backlog. Durkin is seeking to get Rauner the “balanced budget package,” he wants, which includes spending reductions and “meaningful reforms.”

“I am disappointed that we’re taking this up at this moment when there has been significant, significant progress to address the priorities of the governor and also the priorities of this caucus,” Durkin said.

There are, of course, political ramifications to supporting a tax hike, on both sides of the aisle. Some House Democrats were expected to vote no to try to shield themselves from Illinois Republican Party attacks in next year’s election. But some House Republicans, knowing they’d too be targeted for supporting it. said there’s no other choice.

Others were even more fatalistic: “If I lose my seat so be it,” state Rep. Michael Unes, R-Pekin said, adding the state shouldn’t have gotten so close to a financial collapse. “Without this, we will lose thousands of lives and thousands of jobs and the alternative is so much worse. I don’t like this. This is not easy. This is really, really difficult,” Unes said. “But the alternative is much worse than this. The alternative is literally taking our state off the cliff.”

David Harris was among the Republicans who supported the bill, while also urging the governor to sign the revenue and spending bills if passed: “Have the courage to do what is right and bring this madness to an end.” 

“I was not elected as a state legislator to help preside over the financial destruction of this great state,” Harris said. “I respect my colleagues who are voting no. But to me, enough is enough.”

Meanwhile, changes made by House Democrats from the original Senate bill include the removal of streaming and satellite fees. It also closed corporate tax loopholes, increased the earned income tax credit, and restored the research and development and manufacturers’ tax credit to attract more businesses.

House Democrats filed amendments to both the tax and spending measures on Sunday, which included nearly $400 million more in cuts. Although some House Republicans voiced frustrations over changes, House Democrats said they were reflective of topics discussed during negotiations.

It is unclear if the passed tax increase will be sufficient to placate S&P. Recall July 1 was the date when the credit agencies said they would drop the state to “junk” status without a budget. Ultimately, the fate of Illinois" credit rating is now in the hands of Rauner, and whether and how fast his imminent veto is overriden.

Ultimately, Illinois faces a lose-lose dilemma: get junked and see its funding costs soar, or save its lowest possible investment grade rating, and watch as what is already the worst metropolitan exodus (recently the population of Chicago shrank the most of any US city), go into overdrive as tens of thousands more scramble to escape the state"s soaring tax rates.

Illinois Policymaker: "We Are About To Become The Financial Deadbeat Of The Nation"

One week ago, Illinois state comptroller, Susana Mendoza, gave a detailed explanation in her letter to Gov. Rauner and members of the state legislature - two parties that have been locked in a nearly three year long confrontation, preventing them from agreeing on a state budget - explaining why Illinois was on the verge of total collapse.

"The state can no longer function without a responsible and complete budget without severely impacting our core obligations and decimating services to the state"s most in-need citizens," Mendoza wrote. "We must put our fiscal house in order. It is already too late. Action is needed now." And unveiling the most dire language yet, in her letter Mendoza said "we are now reaching a new phase of crisis" perhaps in an attempt to prompt the Democrats and Republicans to sit down and come up with a compromise

Since then, despite all parties" "best efforts" (actually, there have been no real efforts whatsoever)  to reach a compromise after two years of failures, nothing has really changed, with the only difference that Illinois is now just three days away from financial armageddon, because come July 1 and the state has no budget for its third fiscal year, a downgrade of the state to junk - for the first time in US history - is assured, unleashing interest rate hell for future debt issues, and ultimately, bankruptcy.

Those are not our words, but those of Ted Dabrowski, vice president of policy at the Illinois Policy Institute, who said that the Illinois budget crisis has become so dire that the state is in danger of entering a financial "death spiral," as a result of the imminent downgrade to "junk" status. Doing so would increase the cost of borrowing, worsening the deficit and making it even harder for taxpayers to dig out of the hole.

“We’re in a death spiral—Illinois has the worst pension crisis in the nation and needs the boldest reforms,” Ted Dabrowski, Illinois Policy Institute’s vice president of policy, told Fox News. “There is no doubt that junk bond rating is on its way.”

As we first reported a month ago, S&P first warned it would most likely lower Illinois" credit rating to below investment grade if the state fails to adopt a budget for a third straight year.  Lawmakers are now in a special session in an effort to break the budget impasse, prodded by Republican Gov. Bruce Rauner... who has referred to his state as a “banana republic.”

There"s ample reason for such a fruity comparison: the state faces over $250 billion in unfunded pension obligations, a $7 billion budget deficit, a backlog of over $15 billion in unpaid bills, and - drumroll - $800 million just in interest on unpaid bills.

A downgrade to “junk” status would immediately spike the cost of borrowing for all projects, including critical infrastructure, as well as refinancing existing debt. Which for a state in the "ponzi finance" stage of the Minsky curve, is critical.

Dabrowski said passing a budget would “stave off” the junk rating, but the pension crisis in the state could only be remedied by “bold reforms,” such as a transition from pensions to 401(k) plans. He said the state risks becoming the “financial deadbeat of the nation.”

With just over 72 hours remaining, some lawmakers still see hope for a deal.

Senate President John J. Cullerton, a Democrat, “remains optimistic” the legislature can reach a balanced budget, as there is a “shared sense of urgency” among the legislative leaders, according to his spokesman. “For a state with history of dreaming big and building big, a downgrade to junk status would be an embarrassing black mark on our standing and signal an unacceptable lack of confidence from the financial sector in our state,” Cullerton’s spokesman, John Patterson, told Fox News.

Rauner claims that the Republican plan for a budget could fix the state’s financial situation and called it a “true compromise.”

The plan incorporates reforms like property tax relief, term limits and spending caps, which have caused an “ongoing confrontation” between him and Illinois’ Democratic House Speaker Michael Madigan, 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.”

When asked whether the legislature would be able to pass a budget package by the June 30 deadline, and about the likelihood of the change in rating, Madigan’s spokesman Steve Brown did not speculate. “I don’t do predictions—there are numerous discussions around the State House on an effort to bring a balanced budget and see where there might be support for that,” Brown told Fox News. “I’m not in finance.”

And if the budget fails, Illinois will — as we reported before — lose the lottery. 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 the 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.

Of course, if Illinois becomes the first US state ever downgraded to junk, and the yields on its obligations explode forcing the "deadbeat" state to collapse into a "death spiral",