The House voted to override Rauner’s veto of a budget today following a brief lockdown mode after white powder was thrown at Governor Bruce Rauner.
Emergency crews and a hazmat team at the Capitol determined the substance was not toxic.
Crain’s reports It’s official: Illinois has a budget. Your taxes are going up.
The action came on a largely party-line vote of 71-42, the bare number needed, with GOP lawmakers who broke from Rauner in passing the bill last week joining with all but a handful of Democrats to finalize the tax increase.
Since the Senate already had voted for an override, the action means that, effective July 1, the individual income tax will rise from 3.75 percent to 4.95 percent and the corporate rate from 5.25 percent to 7 percent.
Minutes after, the vote on the tax hike: the budget was approved 74-37 and the budget implementation bill 71-41.
Roll Call
A Roll Call highlights the action.
Republican Reps. Cavaletto, Davidsmeyer, Meier and Reis all switched from being “Yes” on 3rd Reading to being “No” on the override. So, they lost 5 Republicans (Rep. Pritchard was absent) and still approved the motion.
Democratic Reps. Halpin, Manley, Mayfield and Scherer switched from No to Yes. Scherer had said repeatedly that she was a “No” vote and is considered a target, so that vote is really interesting.
Junk Anyway
The Illinois Policy Institute reports Illinois Budget Proposal May Not Be Enough to Avoid Junk Rating.
The tax-hike, no-reform budget House Speaker Mike Madigan is pushing – and some Republicans have blessed – might not be enough to prevent a downgrade to junk, according to Moody’s Investors Service.
The rating agency warned in a press release July 5 that it was placing Illinois “under review” for a possible downgrade – even after acknowledging the impact of additional tax revenues.
Illinois is only one notch above junk status. If Moody’s decides to downgrade Illinois, Illinois will be the first state in the nation to ever fall to junk status.
The agency decided to put the state under review despite the fact that it expects lawmakers to override Gov. Bruce Rauner’s veto of the $4.8 billion tax hike, saying the review “incorporates our expectation that the legislature will implement revenue increases.”
Moody’s Reasoning – Key Points
Moody’s explained the possible downgrade in a credit service notice: Illinois’ GO and Related Ratings Under Review for Possible Downgrade
- The decision to place the state’s ratings under review for downgrade incorporates our expectation that the legislature will implement revenue increases, overriding the governor’s vetoes.
- Despite the progress toward budget balance that the emerging fiscal plan embodies, the plan entails substantial implementation risk.
- The state’s baseline tax collections declined in fiscal 2017, suggesting that any tax increase may yield less revenue than anticipated in coming months.
- The plan appears to lack concrete measures that will materially improve Illinois’ long-term capacity to address its unfunded pension liabilities.
- A June 30 order from a federal judge that the state accelerate payments owed to Medicaid managed care organizations and service providers cast doubt on the state’s immediate ability to keep up with its statutory pension contribution schedule while also meeting obligations for debt service, payroll and school funding.
- The state anticipates addressing its approximately $15 billion backlog of payments owed partly through a bond offering that probably will rank among the largest in the state’s history.
- The state’s broader fiscal plan leaves Illinois not only dependent on market access to ease liquidity pressures, but also facing a significant increase in its tax-supported debt burden.
- The effectiveness of the state’s strategy to contain and reduce its deferred bills, once the backlog-financing debt has been issued, remains to be seen.
Five Givens
- It is a given that the tax hike will not raise as much as expected.
- It is a given that public unions will demand raises after this tax hike.
- It is a given that some businesses will exit the state and others who may have been thinking about locating in Illinois will change their minds.
- It is a given that wealthy taxpayers will leave the state.
- It is a given that the budget fixes nothing.
Too Much
The tax hike is excessive. It will not bring in the anticipated revenues and much of the revenue the hike does bring in will be squandered for the reasons noted above.
Too Little
Governor Rauner is 0 for 44 in reforms he set out to accomplish. In fact, the corporate and personal tax hikes put the true score at -2 out of 44.
Too Late
Cash-strapped cities suffer under prevailing wage laws and untenable pension promises.
Corporations suffer under the worst workers’ compensation laws in the nation.
Citizens suffer from the highest property taxes in the nation.
It is too late to save Illinois from insolvency. Rather than fix the problem, these tax hikes will make matters worse.
Five Desperately Needed Reforms
- Municipal bankruptcy legislation
- Pension reform
- Right-to-Work legislation
- End of prevailing wage laws
- Workers’ compensation reform
Number one on my list of Illinois reforms is bankruptcy legislation. It is the only way out for numerous Illinois cities whose hands are tied by union-sponsored prevailing wage laws and pension plans.
Despite massive gains in the stock market since 2009, Illinois pension plans have gotten deeper and deeper into the hole.
Even a modest pullback in the stock market will sink numerous Illinois pension plans. I expect much worse than a modest pullback.
Required Pension Contributions to Double or Triple
Inquiring minds will also wish to consider Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely.
Illinois faces the same fate or worse.
Tax hikes are not the answer. Reform is the answer, and bankruptcy reform is at the top of the list.
Mike “Mish” Shedlock
Gonna get ugly up there…..
Poor Rauner. I do hope Bruce is okay and the white powder was just baking soda or some such thing.
If only they could print their own money.
States can’t compete with the federal government.
Get out is my advice. Everyone in my extended family has left the State, and most of my friends, all taxpayers….The government(s) will come for everything you have, because their pensions and every expanding healthcare benefits are sacred….
https://www.infowars.com/bankrupt-illinois-the-beginning-of-the-end-for-the-democratic-partys-social-welfare-state-experiment/
Best add a Prop 13 to the above list Mish.
Illinois politicians do not allow Propositions like California does.
Way too late…..
IL was insovent before and becomes more insolvent now.
I think I am correct in saying that the additional Medicaid payments identified by a Federal Judge last friday was not included in teh budget, otherwise the budget spending woudl be up in th elow 40’s.
not to worry, the state wil borrow 20 billion to pay off vendors and Medicaid.
From whom ewil it borrow, I have no clue. Who in their right minds will lend IL money.
Oh, btw, Cook County and Chi are in deep doo doo too.
I don’t think IL can float a bond issue at rates it can possibly afford, the deficits and pension disaster are too great even for the dummies in the bond market.
The only reform needed is to vote in those who wish to reform the state and vote our all democrats and Republicans who do not wish to truly reform the state’s finances. That means voting to end public unions that demand more and more while delivering less and less. That means killing the union power that holds the state hostage to increase union wage and benefits demands. That means reducing the number of state employees, particularity education employees that have little effect on the education of the youth of the state. I could continue, but the point is that so many of the state employees are beholden to the state for employment that is little more than sinecures for their existence. Perhaps if those who are members of the state legislature or executive government lost their rights to pensions then we might see a difference of attitude towards the state spending of tax income. Imagine having to earn a pension. Well, all of this is pie in the sky, sorry to say.
“Imagine having to earn a pension. ”
Imagine managing such pension fund and earning 1.5% returns during a rampant bull market while cowering in fear over losing any of your underfunded asset base. With the governor purportedly already getting cyanide thrown at him, what becomes of these politically correct would-be managers?
The answer to the abuse by politicians is to place their retirement funds in the same pot as the workers. Actually, why not carry that over to corporations as well? If Madagan had to worry about losing his pension because it wasn’t properly funded do you think he would be so eager to spend all that state money on pet projects? Better yet, put his retirement funds in state and city bonds that cannot be sold until he reaches 65. Yeah, that would be sweet.
Hi William! It appears to me that the pension issue is a tough nut to crack. Apparently, from what I read from Mish and many posters, many (most?) US pensions are seriously underfunded and/or poorly managed. I am not sure why this is such a problem in the US because it isn’t like that in so many other countries. I don’t know why other countries manage pensions (or health care) so much better than the US. However, my recommendation, as usual, is to simply have a look at what other countries do better and try to learn from them going forward. (I know this will irk some posters, but maybe it’s time to swallow that American pride and admit that you might be able to learn from others.)
In the meantime, it appears many US pensions are going to default if they are not fixed. Obviously, the fix will require some or all of the following; increased contributions, reduced future benefits, reductions in existing pensions, realistic actuarial assumptions, independent third party management, increase in working years, decrease in pension years, etc. I assume this also applies to your Social Security System. It’s time to take a Realistic approach.
I hate to burst your bubble, but the pension mess is not just limited to the US. I’ve been following pensions since the late 1970s when a few individuals raised the problems of over reliance on rate of returns versus the under reliance of contributions. I worked for Pacific Bell for 26 years and the pension formula was very simple. One received after 15 years of service a pension that amounted to 1 percent of the yearly wage for the number of years of employment. Since one could never have entered the company workforce earlier than age 18 and mandatory retirement was age 65, the most years one could work for the company was 47 years. The majority of individuals in craft and lower management put in between 35 and 40 years of service. So my retirement was 26% of my yearly wage when I retired. the retirement would have been paid out of a trust that held PacTel and AT&T stock. Up until the 1990s, that was a pretty safe bet. I took a buyout of my pension betting that what I received could be invested at a better rate of return than trusting to the future of the company. Well, 2008 fooled us all and I took a dead loss on the investment idiots who did not foresee the big rescission.
My English friend here in France is retires on a UK government pension. He was a university teacher and he tells me of the problems that those in charge of pensions made for the retirees. Changes that were made were not always communicated to the recipients and many times those retirees failed to act out of ignorance of those changes and lost a lot of their money. It is estimated that public pensions in the UK, while not as underfunded as those in the US, are significantly underfunded.
There is no realistic approach, there is only the need by administrators and politicians to game the system to make themselves look good and to hell with the individual.
Frankly, all institutional pension systems should be destroyed, period. You want a pension? Save it yourself. Take it out of the hands of corporation CEO, government officials, and all the others who will always game the system. Ask for the money that would have gone into the pension system and take it and invest it yourself. Buy treasury bonds and make 2% a year if you wish. Buy stocks that promise the moon and take your capital. It’s your future, so do something with it.
Don;t want to save? Want the big return risk? Hey, it’s your dime. At the end if one has squandered one’s retirement capital, tough shit, live with your choices. That’s how you reform pensions.
Just seconding what the Bean just said: I don’t know what your sources are or what high you’re on but you are flat out wrong. Underfunding is a global issue — obviously it ebbs and flows with the artificially pumped up risk-asset markets. Search the web for a recent World Economic Forum report on global pension underfunding. By 2040 or 2050 global pension funds will be underfunded to the tune of $400trn (of which the U.S. is just a modest portion).
Defined benefit pensions at private companies (almost non-existent these days) are rarely fully funded and rely on the company continuing to be an ongoing concern till all those DB scheme members pass away. Public sector pension schemes are worse — most, particularly in Europe are not funded at all. They rely on future tax-payers for funding (and with the demographic time bomb ticking away in Europe, all I can say is “good luck with that”).
Defined contribution pensions rely on strong economic growth ad infinitum (read: equity markets rising for ever and ever) and given that they (equity markets) are grossly over-valued and the globe due a huge recession, the short-to-medium term future for pension funding is not looking great. As for bonds, with yields at close to historic lows …. I bet pensioners are agog at earning 1 or 2% p.a. on those bad boys.
There is a time to be long, to be short and a time to go fishing / quote Jessee Livermore
It s summer time seasonnality statistics from Hirsch famous stock trader almanach tell me
to exit stay out of the stock markets sp 500 and Nasdaq are down same with cac all shares in France so gotta go and be back on mkts and swing trading stxx beginning of November 2017
for new adventures
My profit loss account is up and I am consistant and steady as my method works
Size positions correctly not more than 5 % like big investors / funds
money management is paramount so manage each position in your portfolio
carefully
don t use stop losses but mental stops instead to protect yourself from market makers and brokers
choose pick up the best stxx with fundamental research and advanced technical/ chartist / price move analysis before pulling the trigger
Is there actually a decent state to move to so that this nonsense wouldn’t repeat itself down the road??
Wisconsin, for now. South Dakota is in good shape with no income tax.
South Dakota is an excellent choice…low taxes, sane government, and they also offer the option of “virtual residency” via private mailbox. If you travel frequently and are not tied down it is an excellent place to live 🙂
Wyoming use to have a balanced budget prior to the drop in oil prices I believe. Pretty windy and cold in some parts.
Arizona currently is fiscally conservative, though can’t guarantee forever in this world.
downgrade illionois moodys will have to downgrade every state and especially federal gov’t.DC has already burned through the $1.2T allocated in Jan.They’re gonna to have to raise the dept ceiling limit by at least $1.5T just to make to next summer,how is that not a triple C rating?Oh i forgit they can just print all the cash they need
DC can print money, Illinois can’t…
They have definitely entered the final death spiral now. Even if the taxes imposed directly by this “compromise” doesn’t directly render too many Illinoisans bankrupt, more and more of them will realize that this is only the beginning, and start preparing to jump ship.
Especially with so much of their so called “wealth” tied up in overpriced and over leveraged real estate, it doesn’t take much of a change in sentiment, before the current “it will probably work itself out”, turns into a stampede for the exit. Nobody wants to be behind that development, and find themselves stuck with a $500K mortgage for a house they can only get $300K for if they sell. While taxes, levies and mandatory this and thats, go up and up and up. While their friend and former neighbor cashed out before the fall, and is enjoying retirement in Arizona while watching the debacle from afar.
The poor saps who are currently getting suckered into buying into shoddily slapped together, tiny condos currently selling for at least 10X construction cost, are definitely not going to be happy. I hope foe their sake they didn’t put much down…. And have whatever other wealth they may have, securely tucked away in hidden cash, gold or anonymous Bitcoin. It ain’t gonna be pretty….
Forget the mortgages. If you own a house free and clear, the taxes will go up while the value goes down. It will just suck money out of your retirement savings. You will wind up doing what tens of thousands of Detroiters did – either sell at any price you can get or simply abandon the house before paying taxes out of your seed corn.
But the media will gladly show news reports about six gentrifying areas to make you not look at the 24 collapsing areas. You see this today with all the silly reports of some Detroit Renaissance (in select neighborhoods only – all subsidized by taxpayers) while Flint, Saginaw, Hamtramck, etc.all get even worse.
Illinois: the absurdly, ridiculously dysfunctional state.
If IL is not able to stay afloat does anyone object to it being revoked to Territory status?
Let IL clean house before it has Senators and Congressmen in DC
Based on what I read, one of the republicans that voted for the tax increase received $4.5 million for his district and has a personal business that relies on the state. Another republican who voted in favor of more taxes supposedly got $14.5 million for a metra station.
It’s all pay-to-play in IL. That’s why Obama decided he needed to “be from Illinois” once he made the plunge into politics. If he’s from Illinois, then I’m a hula dancer from Hawaii.
If need be, some lottery winner annuitant will get stiffed to pay for that politician’s pork barrel project.
First Illinois borrowed to pay operating costs. Now they will borrow to pay creditors. Next up: bond issues to pay the interest on bonds. The last adult has clearly left Illinois.
One day (not only in Illinois, but across the developed world) governments will simply run out of real money and the all parasites, cronies and zombies who live off the sweat of the productive classes will be f****d.
Bring it on right now.
We can stipulate that Illinois will be able to pay their bond debts in the next 12 months. How about the next 10 years? Or 20 or 30 years? Can anyone make a rational case how Chicago Schools, City of Chicago and Illinois state will be able to pay say 30 year bonds when they mature?
The problem is US, you and me. We investors, with the aid of the ratings services and Wall Street Investment banks, keep buying their bonds. We buy 1 year bonds all the way out to ~ 30 years. The rating services are a FRAUD. They have the same bond rating for a 1 year bond as for a 30 year bond. The reality is that the default probability goes up exponentially over the 30 year time frame. Even if the rating services leave the state at investment grade, they need to split their ratings and create long term ratings of D aka “Certain Default.” Then the 30 year bond need to come with a “Black Box Warning” like on some pill bottles. The warning should say: “You are AN idiot if you buy these bonds. You are NOT going to be repaid.”
What this proves is that PT Barnum is alive and well. Plenty of investors will keep showing up and buying these bonds. And then one day they will make up and find out they are Vallejo, Stockton, San Bernardino, Detroit and Puerto Rico re-incarnated.
What percent of “investors” know they own these bonds? Since most muni bond holders own mutual funds/ETF’s, they do not realize they keep funding this mess. Many investors were surprised to learn their muni mutual funds had a large slug of Puerto Rico bonds. They had NO IDEA until the bonds were falling like rocks.
The other side of the coin is that IF investors refused to buy the bonds, then Illinois would be forced to fix the mess immediately. They would not need anything more than the legislature and governor.
Situations like this tend to go on a lot longer than rational people expect. So the end game is pretty clear, when that day comes is NOT knowable. In the meantime, the band is playing, so we gotta keep dancing. . . .
Thanks,
Speak for yourself. 🙂 I’m not buying and state or municipal bonds or funds that invest in them. So many walking dead, dead beat states.
Delusion is he only path of survival……brief, but survival for the moment.
A is A.
The abandonment of reason, of our rational mind, of mathematics, in favor of ideology, religion or simple hope, is suicide. It will take a while longer, but as with bankruptcy typically occurs, they will get there…..slowly at first and then all of the sudden.
Another death spiral brought to us by policymakers consistently making bad decisions for decades. Perhaps Illinois will prove that there really is a point beyond which higher tax rates cause lower revenue; not that anyone in a respected position will give the Laffer curve any more respect. No doubt they will blame “other economic factors.”
Not a problem,,,Grandma Janet will buy Junk too. She’s likely busy printing up the wherewithal as we speak. If banks are too big to fail, surely States are too, no?
Hey Ben, tell us again ’bout “Moral Hazard.”
Credit rating agencies are ALWAYS late to change ratings. With Illinois’ finances, assume the worst.
Anyone of means who stays in that God forsaken state and accepts a financial flogging for sins committed by political thieves at their state capital is a masochist and a willing participant in the master-slave relationship.
What we have here is a collection of financially-failing states, not just Illinois and California, living out fantasies of various sorts (e.g. pension promises) within a larger USA.gov confederation. Unfortunately, USA.gov is living out the debt-based fantasies of the War Party (military bases in 110 countries, global wars) and Socialists (e.g. endless Obamacare subsidies and Medicaid payments to the states). Eventually all the fiat, bonds and other forms of debt and promissory notes of the indebted states and Puerto Rico will approach zero value without bailouts from a USA.gov that is itself heavily indebted and defaulted on its fiat currency in 1971. The form and timeline of the financial reckoning are major questions.
Is there any upper limit to debt and fiat issuance?
The rate is rising from 3.75 to 4.95. Not a big deal. What’s surprising is it was ever 3.75 to begin with. That’s really low. I think the national average is around 5%. In California, it’s 13.3%. I pay 5.75% in Maryland.
In 2014, total tax revenue per capita in Illinois was the highest of any state in the Great Lakes Region at about $5498 and was actually higher than California at $5449, with the national average being $4675. Only certain states were significantly higher, and for good reason (NY, NJ, CT, ND, AK, DC) at ($8410, $6448, $7249, $9746, $7555, $9667) respectively.
According to these guys: http://www.taxpolicycenter.org/statistics/state-and-local-tax-revenue-capita
C’mon Mish! Your slacking on your musical tributes 😉
The Constitution prohibiting states from coining anything other than gold or silver coins is helping rescue Illinois from turning into another Venezuela. Venezuela bankers printed super inflation, which turned their economy into a banana republic economy.
We could use a gold standard at the national level too. A gold standard protected our ancestors quite well.
Reblogged this on World4Justice : NOW! Lobby Forum..
someone earlier said to put the legislators into the same pension system, and that would solve it.
The Illinois legoslators have a very generous pension plan, however, its only 11% funded.