In mid-August 2015, the state government of Illinois began to “technically default” on payments it owes on its outstanding debt, joining the fiscally troubled U.S. territory of Puerto Rico in the hall of debt shame. Writing at Business Insider, Certified Financial Advisors Michael Comes and John Mousseau describe how that happened and what that means.
In what has been a not-so-stunning turn of events over the last week, the State of Illinois has failed to appropriate funds on a certain class of its outstanding appropriation-backed sales tax debt issued by the Metropolitan Pier & Exposition Authority (Met Pier). The mechanics of this missed payment mirror Puerto Rico’s default on its appropriation-backed Public Finance Corp. (PFC) bonds earlier this month.
To be sure, Illinois has not missed a payment on its outstanding debt. It has, however, failed to make a monthly payment to the trustee for a December 15th payment, a covenant breach that constitutes a “technical default”— not a payment default, but typically the first step that fallen angels take on the way to a payment default. In mid-July Puerto Rico failed to appropriate funds to a trustee, which later resulted in a payment default on a class of its outstanding debt….
S&P has stated in a recent report that the Illinois non-appropriation “underscore[s] the fiscal challenges associated with the protracted budget stalemate.” In other words, the political process has corrupted sound decision-making. The State of Illinois, like Puerto Rico, has the funds to make the debt service payment, but the Illinois legislature did not appropriate the funds because it did not have a 2016 budget enacted as of the July 1 due date.
So it’s not that they don’t have the money to be able to make the payments, so much as the state has what has been called a “strange budget impasse” between its long Democratic Party-controlled legislature, which wants to increase taxes and spending, and its recently elected Republican governor, who has sought to restrain and reverse the state’s excessive growth of both taxes and spending in recent years.
Last week, Illinois’ technical default spread to include winners of the state government’s lotteries. ABC 7 Eyewitness News reports:
CHICAGO (WLS) — Due to Illinois’ state budget impasse, Illinois Lottery officials now say that any winners over $600 will experience a delay in payments.
Beginning Oct. 15, officials say they anticipate that the lottery’s check writing abilities will be exhausted.
Previously the delay only applied to winners over $25,000. Officials say that all outstanding winnings will be paid once a budget is passed.
Since the money for the state lottery’s payouts comes directly from the purchases of lottery tickets in the state, the state’s action to replace the jackpots it owes with $600 and IOUs is an indication that the lottery’s funds are being diverted to other purposes. The Chicago Tribune reports on a just-initiated class action lawsuit alleging improprieties in the offices of the Illinois State Lottery:
Two winners sued the Illinois Lottery in federal court last month, alleging fraud.
Their attorney, Thomas Zimmerman Jr. of Zimmerman Law Offices, said he plans to file an amended complaint later this month, adding at least 20 other lottery winners whose payments have also been delayed. He expects more winners will join the class-action suit now that the lottery has lowered the amount for immediate payouts.
“The state is violating the lottery law by using the money to pay the lottery’s operating costs and ongoing administrative expenses … without first paying winnings,” Zimmerman said. “Is the lottery director not earning a paycheck? And all of the employees who run the lottery, how are they getting paid?”
That is a good question to ask, as also is the question of how the state’s legislators are being paid without having passed a budget to authorize their salaries and expenses. The answer to that question turns out to be pretty straightforward, as they would appear to have specially looked out for their own interests. Robert Steere of the Illinois Policy Institute marked the occasion back in September 2014, when the state’s legislators put themselves at the front of the line for getting paid, with or without a budget, thanks to a law signed by the state’s previous governor in the months before being voted out of office:
In the waning hours of the final day of this year’s spring session, state politicians chose to exempt their own budget from the scrutiny of the annual appropriations process, the first line of defense against irresponsible spending.
House Speaker Michael Madigan and Senate President John Cullerton joined forces to introduce and enact a law prohibiting reductions from year to year in the appropriations made available in the annual state budget for legislators’ salaries and legislative operating expenses. Plus, their new law permits the payment of these salaries and expenses even if there is no annual appropriation for that purpose.
No other office or agency of state government is given such a free pass on budgetary oversight.
The next stop on the Illinois state government’s technical debt default train appears set to be state employee pension funds, where according to the Reuters news agency, upcoming payments will be delayed:
Illinois will have to delay a $560 million November payment to its pension funds, and may also delay or reduce a similar payment in December, state Comptroller Leslie Munger said on Wednesday, blaming a cash crunch stemming from the state’s budget impasse.
“The fact is that our state simply does not have the revenue to meet its obligations,” Munger told a news conference in Chicago.
Despite the delay, state pension funds will be paid in full by the time fiscal 2016 ends on June 30 using money from heftier revenue months in the spring, she said. Illinois has the worst-funded pensions and lowest credit ratings among the 50 states.
Meanwhile, employees of the Illinois state government are still being paid their wages and salaries in full thanks to a court ruling, so the delay in funding their extraordinarily generous pensions really only represents a minor inconvenience for them.
The state of Illinois’ current precarious fiscal situation did not arise overnight nor did it arise by accident. Its elected officials have been too careless with their fiscal responsibilities for too long, which is why the people of Illinois are now faced with such a deteriorating condition in their public finances. It will take state officials who genuinely put the public’s interests ahead of their own to reverse its course and put it on a sound footing.
As we recently noted, the California Department of Transportation employs 3,500 full-time engineers who do little more than sit at their desks. The state’s Legislative Analyst wants to cut these positions, but Caltrans executives cried foul. So did union boss Bruce Blanning, executive director of Professional Engineers in California Government. Blanning told reporters the Legislative Analyst was “childish,” that idle staff should be kept on in case of future projects, and that outsourcing work to independent contractors “wastes taxpayer money.” That is the prevailing view among government employee unions, who demonstrate outside the state capitol chanting “This is our house!” A recent development lends support to that reality.
As Jon Ortiz notes in the Sacramento Bee, the state of California just gave Professional Engineers in California Government a raise of 7 percent, retroactive to July 2 and lasting until June 30, 2018. But the 13,000-member union did not get everything it wanted. As Ortiz notes, “the union agreed to start paying a percentage of salaries toward retiree medical care and other post-employment benefits.” Imagine that–government employees actually paying for benefits. Not to worry because “the state will match the employees’ contributions to the retiree-benefits fund.” So it’s another sweetheart deal for the union whose website proclaims “Engineering California’s Future” and “Designing projects for today and for generations to come.”
One of those projects is the new eastern span of the San Francisco-Oakland Bay Bridge. As we have often noted, this project ran $5 billion over budget and came in 10 years late. Despite all that time and money, serious safety issues remain. State senator Mark DeSaulnier, who held hearings on the safety problems, has departed to Washington. When he learned of the safety issues, Governor Jerry Brown famously quipped “shit happens.” Brown fired no Caltrans bosses, and as DeSaulnier observed nobody has been held accountable for the safety issues. In those conditions, the Golden State gives Professional Engineers in California Government a pay hike.
When the economy gets rocky, investors often turn away from riskier alternatives to the world’s safest and most risk-free investment, the debt securities issued by the U.S. federal government, in what is often described as a “flight to quality.”
The same phenomenon holds true for the world’s central banks, where the primary financial institutions of a number of nations have loaded up on U.S. Treasuries in recent years as their economies have faltered.
So what are we to make when the exact opposite scenario is happening today? Previously, we’ve noted that China has been selling off its U.S. government-issued debt holdings, but now the Wall Street Journal reports that the central banks of a number of other nations have joined in the selling frenzy of foreign held U.S. Treasury securities:
Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.
Sales by China, Russia, Brazil and Taiwan are the latest sign of an emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt.
Few analysts expect much higher yields in the Treasury market as a result. Foreign private purchases of U.S. debt have increased amid pessimism about the world economic outlook. U.S. firms and financial institutions continue to buy Treasurys, as do some foreign central banks….
In the past decade, large trade surpluses or commodity revenues permitted many emerging-market countries to accumulate large foreign-exchange reserves. Many purchased U.S. debt because the Treasury market is the most liquid and the U.S. dollar is the world’s reserve currency.
While the large scale sale of these foreign-held U.S. Treasury securities would ordinarily place upward pressure on the yields, or interest rates, that the U.S. Treasury must offer to lenders according to the laws of supply and demand, these sales have had little effect on the yields of U.S. government-issued debt securities.
Most likely this is due to the yields on U.S. Treasury securities being held down because U.S. firms and financial institutions have increased their purchases of U.S. government-issued debt in response to new regulatory requirements implemented one year ago, which mandated that they must maintain a set minimum percentage of their investment holdings in high quality, liquid assets.
Although those new regulations took effect in September 2014, the WSJ article describes how the U.S. government debt holdings of U.S. investors, firms and institutions have changed in the current year to date:
U.S. bond mutual funds and exchange-traded funds targeting U.S. government debt have attracted $20.4 billion net cash this year through the end of September, poised for the biggest calendar-year inflow since 2009, according to fund tracker Lipper.
Recall that 2009 was the worst year for the Great Recession, and was characterized by a worldwide flight to quality to U.S. Treasury securities, as investors fled the risk of great losses in other markets.
In 2015, however, the situation is different. It would be one thing if U.S. investors, firms, and financial institutions were completely free to choose how to invest their own funds and were choosing to plow them into U.S. Treasury securities because they believe these are the best available investment option. But one wonders what opportunity costs they are paying because they are instead being compelled by the U.S. government to load up on U.S. government-issued debt. After all, if over the past year they had been free to invest in more profitable opportunities that might provide them with a better rate of return, wouldn’t the U.S. economy be performing better than it is?
These kinds of dynamics help demonstrate how excessive government spending sustained by borrowing is weighing down the nation’s potential for greater real economic growth today and increasing the heavy burden of government on regular Americans.
As Lawrence McQuillan has noted, unfunded pension liabilities have soared to $4.7 trillion nationwide and California accounts for $550 billion to $750 billion of the total.
A case outlined by Brad Branan in the Sacramento Bee shows why California is a leader in this field.
In Loomis, near Sacramento, town councilman Brad Wheeler was collecting a pension of $137,000 a year from a job in Alameda County, but that gold-plated payout wasn’t enough for him. The “retired annuitant” continued to pull down the $137,000 while bagging $60,000 as a part-time fire chief for the Loomis Fire Protection District. Such double-dipping by retired annuitants is common in California, but an administrative judge has ruled that Mr. Wheeler violated state law. Local whistleblowers told Branan the Loomis Fire District never acknowledged the violations. Attorneys for Mr. Wheeler and the District claim he did nothing wrong.
As Branan notes, a judge ruled Wheeler should pay back the $460,000 in benefits he illegally received while working for the Loomis district. According to the ruling, Wheeler and the district and should pay CalPERS for employee and employer contributions owed to the fund during his employment in Loomis. The CalPERS board will vote on the proposed decision on Oct. 21. Even if they approve the payback, which is not a sure thing, this will not solve California’s massive pension problem.
The Golden State maintains defined benefit pensions now soaring out of control. Government employees can still spike their pensions and retire in their 50s, in some cases with 90 percent of their peak salary for life. Nothing will change until the state moves to a defined-contribution system. Former San Jose mayor Chuck Reed is promoting a ballot measure along those lines. The ruling class of government employee unions and double-dippers opposes the measure and all common-sense pension reforms.
The troubled Environmental Protection Agency has a lot of problems, but according to Adam Andrzejewski of Open the Books, a lack of military-style weapons for the agency’s 200 environmental law enforcement agents isn’t among them. The Washington Times reports on Andrzejewski’s findings of how the agency has spent millions of dollars over the past decade in arming its special agents:
Among the weapons purchased are guns, body armor, camouflage equipment, unmanned aircraft, amphibious assault ships, radar and night-vision gear and other military-style weaponry and surveillance activities, according to a new report by the watchdog group Open the Books.
“Protecting the environment just got real. With millions of dollars spent on military style weaponry, the EPA is now literally ensconced with all institutional force,” said Adam Andrzejewski, founder of Open the Books and the author of the report.
“Our report discovered that when the EPA comes knocking they are armed with a thousand lawyers, arrest/criminal data, credit, business and property histories, plus a ‘Special Agent’ with the latest in weaponry and technology,” Mr. Andrzejewski added.
Stephen Moore, writing in Investor’s Business Daily, provides a list of some of the Environmental Protection Agency’s more unusual expenditures for armaments, which includes the following:
The “guns up to 300mm” specification caught our attention because the caliber of ammunition for such a weapon would be nearly 12 inches in diameter. To get a sense of what such a gun would look like, we searched and found a picture of a gun that size:
According to the accompanying specifications, the 300 mm Type 7 Short Howitzer captured by U.S. troops from Japanese forces in the Philippines was capable of firing a 300 mm caliber projectile out to a range of nearly 7.4 miles.
We next searched and found a picture of the kind of ammunition that might be used in such a weapon in today’s world. Here is what a modern 300 mm mortar shell looks like:
And here is a video of how one such 300 mm mortar shell was loaded and fired by Free Syrian Army rebels in 2014 (via Military.com):
https://youtu.be/9O6dTEcQEIc
Clearly, the use of such a weapon is not good for the environment….
Meanwhile, we should note that, like the Environmental Protection Agency’s special agents, the FSA rebels have also been funded and trained by the U.S. government.
One wonders just how the EPA’s special agents would use that size weapon to enforce the nation’s environmental protection laws. Someone at the EPA really needs to explain why it would ever need that kind of firepower to justify using that particular specification on its gun purchase requisitions.
Not long ago, we featured a creative visualization of data developed by Jeff Desjardins of Visual Capitalist showing how all the money owed by all the governments of the world is broken up between them.
Desjardins has surpassed himself with a new world debt infographic, which digs into the ability of the world’s nations to pay back their debts. It makes for a lot of scrolling, but it’s genuinely rich in information.
What he’s done is to rank the world’s nations according to three different measures, each of which is linked to the ability of each nation to pay off its national debt. The first is the Debt-to-GDP ratio, which shows the size of each nation’s total public debt outstanding, at the national level, with respect to its national income, or rather, the size of its economy.
The second measure then digs deeper, adding in the debts owed by each nation’s regional, state or local governments to the national level debt, and then calculating the ratio that total government debt with a government’s total tax revenues collected. This measure perhaps provides the best indication of how capable the governments within a nation are of paying off all their debts.
The third measure recalculates each nation’s ratio of total debt to government revenue, but without the tax revenues collected by each nation’s regional, state or local levels of government, so it’s really the nation’s total debt to national tax revenue ratio.
This latter measure of a nation’s burden of debt then gives an indication of a national government’s ability to pay off both its debt and also the debts of all the other governmental entities within the nation, which is something that would matter if those lower levels of governments were to default on their own debts. The U.S. territory of Puerto Rico, for instance, represents a current day example where that measure has become relevant, although there’s quite a lot of speculation that the state of Illinois may soon join it in needing a bailout by the federal government.
As you can see, the United States ranks 7th in the world based on the national debt-to-GDP ratio (at 103%), and rises to 4th overall once the ratio of total government debts to total government tax collections is calculated (406%).
But if the U.S. federal government ever needs to completely pay off both its debts and those of its states, territories, and other government entities, then it will find itself ranked second in the world overall, at 979%, behind only the economic debt time bomb that is Japan.
Arne Duncan is stepping down as federal Education Secretary, but the Washington Post news story of almost 3,000 words left out some key details. Duncan, one of the president’s Chicago pals, has been the federal point man against school choice. As we noted, the current president, like Bill Clinton and Jimmy Carter before him, does not send his own children to the dysfunctional and dangerous Washington, DC, public schools. In 2009, the same year Duncan became federal ED boss, the Washington Post said needy DC families also “want only a quality education for their children.” Their few alternatives included charter schools and the DC Opportunity Scholarship Program, which provided vouchers of up to $7,500 for low-income students to attend the independent schools of their choice. Teacher unions and federal educrats oppose all school-choice programs, and Arne Duncan captains their squad.
As the Post said, “Mr. Duncan decided – disappointingly to our mind – to rescind scholarships awarded to 216 families for this upcoming school year.” Duncan didn’t just oppose the scholarship program in principle. He took away scholarships already awarded, in effect taking points off the scoreboard. Those deprived families were virtually all black. And as the Post said, “nine out of 10 students who were shut out of the scholarship program this year are assigned to attend failing public schools.” Arne Duncan banished them to the losing team, but that is not the only reason he was out of place.
The federal Department of Education dates only from 1978 and was Jimmy Carter’s payoff to teacher unions for endorsing him in his run for president. The Department now commands a budget of nearly $70 billion. As Vicki Alger notes, student achievement has not improved under the bloated federal bureaucracy, where salaries average $100,000, with executives bagging an average of $170,000.
As we also observed, the U.S. Department of Education deploys an armed enforcement division they claim fights “waste, fraud, abuse and other criminal activity.” The Department actually represents institutionalized waste, fraud and abuse, and that is unlikely to change after the departure of Arne Duncan.
Politicians and pundits like to decry predatory lending, the practice of private banks and credit card companies preying on poor and vulnerable people. Indeed a new federal agency, the Consumer Financial Protection Bureau, was recently established to ride herd on private lenders. As Brad Branan of the Sacramento Bee shows, the worst offenders would be hard pressed to top the government of California.
During the 1980s, California’s Department of Housing and Community Development launched the California Home Ownership Assistance Program, which approved 345 loans at interest rates in the neighborhood of 12 percent. This deal also deploys an “equity share” demand for homeowners “to pay as much as half of the amount a house has appreciated since its purchase.” As Branan explains, “the payments can be quite high.”
The state Department of Housing and Community Development wrote to Robert Frugoli, 55, of Sacramento, demanding “full payment” for the prefabricated house he bought for $58,500 nearly 30 years ago, and on which he had faithfully made payments. The Department told Frugoli to hire an appraiser to peg the property’s value, now some $140,000. So Frugoli, in poor health and living on a disability payment of $1,800 a month, would owe the state of California $40,000. Frugoli and other embattled homeowners say they did not understand the equity-share provision and would not have signed the deal if they had.
Maziar Movassaghi, assistant deputy director at the California Department of Housing and Community Development, told Branan that he and other department bosses don’t understand how the program came about. It was discontinued long ago and only about 10 percent of 345 loans are still active, but bureaucrats are still coming after the low-income homeowners. Their likely solution is to refinance their loans so they can make payments that won’t exceed one-third of their income.
A double-digit interest rate plus a balloon payment of half the appreciated value of the property. By any standard, that is predatory lending. As low-income homeowners are learning, when government claims to help there’s always a catch.
Last week, we considered what your share of your state’s debt is. Today, we’re going to find out which state is in the worst situation with respect to its debt!
Before we go any farther, let’s consider what we mean by worst off. While having the largest debt per capita is not a good thing, where debt is concerned, what matters more is the ability of the state to make its debt payments, where the state must set aside a portion of the revenue it collects from the taxes and fees it imposes upon its residents.
That means that the best way to find out which state is the worst off because of its debt is to compare it to its revenue, where we might like to know what percentage of its annual revenue would be fully consumed by its debt if it were to pay it off all at once.
To show that, we’ll once again turn to the same Bloomberg article we previously featured, where they also provided a chart showing how each state, and also defaulting territory Puerto Rico, ranks according to their debt-to-revenue percentages.
It shouldn’t be much of a surprise to see Puerto Rico at the top of the chart, having over twice the debt-to-revenue ratio of the highest U.S. state in the rankings: Hawaii.
Here, we find that Hawaii is the worst state with respect to its public debt levels, with its total debt consuming the equivalent of 13% of the state’s annual revenues. Hawaii is followed closely by Connecticut and New York at the very top of the list.
What does that mean to you? Well, if any of these states wanted to lower their debt-to-revenue percentage without actually borrowing less, the preferred policy of most politicians seeking to sustain their spending, their most likely course of action to “fix” the problem of having too much debt would be to hike their taxes.
In the case of Puerto Rico, that solution stopped working, so they defaulted. Now, the politicians of that territory are finally having to consider restraining their spending, but even now in default, they keep resisting, hoping they can force their creditors to agree to concessions.
Speaking of which, that particular strategy didn’t turn out so well for Greece when its politicians tried it.
The following chart appeared in a Bloomberg article several weeks ago comparing the size of all-but-completely-bankrupt U.S. territory Puerto Rico with the 50 states. You might want to click on the image to see a larger one to see how your state ranks.
Bloomberg explains the numbers:
Puerto Rico’s debt per capita of $15,637 is more than 10 times higher than the average debt per capita of the 50 states, according to Moody’s. The rating company does not include city, county, or agency debt in the calculations for U.S. states unless the state guarantees the debt. That differs from the totals for Puerto Rican debt, which include all the island’s debt except that of Prepa, the island’s public electric utility.
The state with the worst debt-per-capita figure is Connecticut, where the debt burden is a little under a third that of Puerto Rico. But that’s not the state that’s the worst off because of its debt – we’ll have more on that dubious honor later this week!
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