By: Mark Glennon*
It’s hard to overstate how bad the Illinois General Assembly has become.
Let’s look at just three sets of bills this session that have gotten so far along, have so much support and are so crazy that you truly should be frightened.
Foolish bills that don’t go anywhere are an old story in Springfield. Sometimes they’re just grandstanding for a particular interest group or lobbyist. Sometimes they’re “fetcher bills” — proposed by one guy so his buddy can fetch a campaign contribution for killing it. And sometimes they’re smoke to distract attention away from what legislative leaders intend to pick out at the last minute for a vote.
But these are different. Just the level of support they’ve already received has sent a horrible message, and they may actually pass:
• The “Privilege Tax” to destroy the financial services in Illinois. It’s crazier than we originally wrote. It would impose a 20% tax on partnerships and S corporations engaged in the business of conducting investment management services. A closer look now indicates it probably would apply to gross income — the top line — so never mind whether there’s any profit to tax. And it would apparently apply to service providers working with investment managers, such as law and accounting firms, consultants, actuaries and the like. Even absent that broad interpretation, and even before passage, it’s sending a clear message to much of Illinois’ financial sector: Leave. It would obliterate any form of financial asset management in Illinois, including venture capital that’s essential to tech, one of the few things working in Illinois.
That’s no doubt part of the intended message: People in finance are evil. “Vulture capitalists,” hit the road. It has over 20 sponsors in the House and passed committee and first reading. Senate sponsors include Dan Biss, candidate for Governor. Identical Privilege Tax bills are pending in both the House and Senate. The tax is a sellout to the wackiest elements of the far left that have become so vocal.
• Handouts to the municipal bond plutocracy. Senate Bill 10. Sponsored by Senate President John Cullerton, would force municipalities that want to use state money as collateral to transfer complete ownership of money flowing from state government to a new, separate entity created solely to pay bondholders. By doing that, the bill would ensure a form of mortgage that would be bulletproof even in bankruptcy. It was part of the “grand bargain” supported by many Republicans and has passed a third reading.
House Bill 2584 is similar but worse. It would retroactively slap a blanket mortgage on all future tax revenue and fee income to secure repayment of all bonds issued by Illinois towns and cities, including bonds already issued. That’s a massive give-away to bondholders for no consideration and would result in no benefit for municipalities. It has both Democratic and Republican sponsorship, and passed committee and a third reading. These two bills would move towards ensuring that an Illinois bankruptcy is an assetless bankruptcy — the lenders would have first dibs on most everything.
• State taxpayer bailouts for local governments. Two bills would facilitate the purchase by the Illinois Treasurer of bonds of troubled municipalities, particularly the Chicago Transit Authority, or CTA, and the Regional Transportation Authority, or RTA.
House Bill 3005 would create a means by which state distribution dollars would go directly to the Treasurer for debt service instead of to the local government if bonds purchased by the Treasurer went into default. Importantly, that’s not limited to a payment default. Bond documents contain many covenants that, if violated, represent a “default” regardless of whether they are paid. That means money will go to the Treasurer before it will go to local government services, pension payments and taxpayer relief.
House Bill 3004. similarly says that if the Illinois Treasurer invests money in CTA’s interim financing notes and CTA is unable to pay back those debts, the state can offset those losses against amounts it gives to the CTA.
Those two bills seem might seem fine insofar as they create a means for the state to recoup its losses, but the obvious purpose is to make a bailout more palatable and the bills are clearly written to contemplate the purchase of bonds at risk of default. And the same legislature that authorizes the recoupment can just as easily terminate it in the future.
Other law restricts potential Treasurer investments to high-rated bonds, supporters point out. But that should be of little comfort because ratings agencies have such a pathetic record warning of impending crises and defaults. Most didn’t downgrade subprime mortgage securities until July 2007. The subprime crisis that triggered the Great Recession was already evident then and the stock market crashed less than three months later. Make no mistake: the purpose of those two bills is to have state taxpayers bail out broke municipalities by buying their bonds.
The press covers none of this. All eyes are on the budget debate. Meanwhile, our legislature is out of control.
*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.