Will Illinois Beat California To Default?

This article is about Illinois, but it has obvious implications for California.

FEB. 19, 2011

By CHRISS STREET

Illinois’ powerful Wall Street syndicate of bond underwriters led by Morgan Stanley and Goldman Sachs just postponed the state’s sale of $3.7 billion of four year pension bonds. According to an Illinois budget officer, the delay is “to give potential buyers time to go over Governor Pat Quinn’s fiscal 2012 budget.” This is gov-speak for, “investors aren’t buying because they think we will default.”

The state spokesman went on to say: “We are receiving a great deal of international interest on these bonds. It is only appropriate to give investors time to digest the governor’s budget speech which is Wednesday.” This is serious more gov-speak for, “does anyone speak Chinese?”

Last month Patrick J. Quinn, the governor of Illinois and a Democrat, led an effort to pass a 66 percent increase in state income taxes and a 46 percent increase in the corporate taxes in an attempt to avert a “fiscal emergency” due to a $13 billion budget deficit and $8 billion in unpaid bills to social service agencies, pharmacies and others. It took a certain amount of that “Audacity of Hope” for Quinn to raise taxes during a recession in a state with a 10.1 percent unemployment rate.

This must have been even more difficult with his neighboring states already running slogans on radio and television such as; “Illinnoyed by Higher Taxes?”; “Feeling Squeezed by Taxes?”; and “Escape to Wisconsin” to inflame Illinois taxpayers’ wrath and recruit Illinois businesses to relocate out of the state. Indiana’s Republican Gov. Mitch Daniels said that living next to Illinois is like “living next to the Simpsons,” after convincing Illinois-based Caterpillar Corp. to make a major investment in building locomotives in Muncie, Ind., rather than the company’s home state of Illinois. Undeterred by his predatory neighbors, Governor Quinn put on his game face and told reporters he had to raise taxes, because “Our state was careening towards bankruptcy and fiscal insolvency.” Quinn went on to express how proud he was that his Legislature worked into the “wee hours of the morning” to pass the legislation.

This is gov-speak for; “they waited to pass the tax increase until all you reporters went to bed, so they wouldn’t have to do the perp-walk in front of the glaring lights and television cameras.” Just prior to the failed sale, Goldman Sachs was proudly commenting that even though municipal bond issuers, Illinois and California have credit ratings similar or worse than Portugal’s rating, both states would still be able to borrow at favorable interest rates of around 4 percent versus the 6 percent interest costs Portugal must now pay. Illinois state officials whispered they had confidence that pent-up demand from “non-traditional investors” would be attracted to Illinois bond sales. This is gov-speak for “Our friends in high places will take care of us.”

State officials emphasized that even though state’s bond rating has been downgrades several times over the last several years and their controller says the and the state ended fiscal 2010 with “the worst fiscal position in its history,” Illinois had successfully sold $3.46 billion of pension bonds last year in an offering that was substantially oversubscribed by European and Asian buyers. But all the state’s confidence and bluster seems to have now evaporated as an SEC
Regulatory investigation announced two weeks ago is accelerating. Examiners want to dredge up documents and e-mails to uncover if Illinois and its elitist Wall Street underwriters misled investors and committed SEC fraud in that bond sale last year. Illinois officials say they did nothing wrong and are still confident they will be able to sell bonds soon to avoid a looming default. This is gov-speak for, “We better lawyer up!”