“How did you go bankrupt?”
Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises
By: Mark Glennon*
How will rating agencies, bond investors, and Illinois employers react when the legislative session ends this Saturday? Here’s what they will be seeing, by all indications to date:
-A slopped-together state budget that even supporters admit is full of borrowing, accounting gimmicks and can-kicking.
The Bond Buyer, a respected industry publication, reported yesterday that market participants are saying the state budget “won’t sit well with investors or rating agencies.” Bloomberg just wrote that “the crisis is back in Illinois.”
Maybe a string of downgrades next week? Maybe investors dump state and local bonds irrespective of what rating agencies think? Rating agencies have been late to recognize every major financial meltdown in recent memory — Enron, the Russian currency crisis in 1998, the sub-prime fiasco, Southern Europe, and many major emerging market bond crashes. Most investors know that.
A run on Illinois state and local bonds may be irrational because those bonds are either secured or protected by a payment priority — they ultimately get paid even in the worst cases. But markets aren’t always rational. And other bad consequences are more probable, like the exodus of employers becoming a stampede.
What makes our problems “unique” is the “layering effect,” as Chicago’s CFO, Lois Scott, said recently. Those excessive layers of government we have in Illinois, far more per capita than other states, almost all face massive problems. The media and rating agencies usually look at them one at a time. They see big problems but nothing to panic about. They forget that the same taxpayers ultimately have to pay for all of it. And those taxpayers in both parties are fed up — at the “top of the Laffer Curve” — as economists say. With half the state already wanting to flee, higher tax rates yield little or nothing beyond the first few years.
For now, the crowd who says “the sky is not falling” still has plenty of followers. Senate President John Cullerton still gives his things-aren’t-so-bad speech whenever he can. Just yesterday, Greg Hinz at Crain’s said “Illinois finally has begun to dig itself out of a budget hole” — if only we’d make the income tax hike permanent. And Governor Quinn’s State of the State message was “Illinois is making a comeback.”
But the absurdity of denial will become universally apparent — eventually, and perhaps very soon. Things that can’t go on forever, don’t, as Herbert Stein said. A few reporters will see that the facts don’t remotely fit that narrative and, like birds flying off a power line, the rest will follow. Prevailing sentiment will plummet further.
With any insolvency it’s hard to know when flames will burst out and really melt things down. Springfield will do its best to push it off until after the November elections and try to blame a new governor. Maybe they’ll succeed.
Or maybe not.
*Mark Glennon is founder of WirePoints