"Illinois lawmakers were in disarray Thursday as they groped for stopgap measures to address a $13 billion deficit equaling nearly half of the state's general-fund revenue. ... But the confusion in the legislature indicates that serious steps to fix state finances won't be taken until after the November elections--if then. ... An income-tax increase proposed by Democratic Gov. Pat Quinn is going nowhere. Even temporary steps, such as borrowing to make pension payments, have stalled. Illinois is months late on many of its bills and has no plan for catching up. ... A bill under consideration in the state House would give Mr. Quinn greater leeway to shift money among state funds and to require agencies to set aside part of their budgets now in case of future cuts. ... 'We are lucky in that we can still borrow,' [Donne] Trotter said, noting that lawmakers responded to rating-agency concerns last month by reducing pension benefits and lifting the retirement age for new state employees to 67 from 60. Lawmakers also are weighing the idea of postponing pension payments for the first half of the fiscal year until January, Mr. Trotter said. ... Mr. Quinn presented a budget in March that would still leave the state with a $10.6 billion deficit. His plan projected a deficit of $4.7 billion for the coming fiscal year beginning July 1--which he planned to cover through borrowing--and a $5.9 billion deficit carried over from the current budget. ... California officials said this week that April personal income tax collections lagged projections by 30% Federal estimates don't bode well for states, either", Amy Merrick at the WSJ, 7 May 2010: http://online.wsj.com/article/SB10001424052748703686304575228582377071698.html.
Illinois budget looks worse than California's. An old Chinese curse was, "May you live in interesting times". An updated version might be, "May your portfolio consist of 50% Illinois and 50% California muni bonds".
3 comments:
When the states and municipalities get the courage to face the great deficit monster they won't default... they'll likely restructure the debt... stretch it out...
And if you own that debt could be painful...
Beyond the crushing deficits, Illinois and California have little in common. CA's governor proposed $8.5 billion of specific spending cuts--along with re-allocation of almost $6bln in Federal money--to close their budget gap. Illinois' governor and state lawmakers lack the political will to do ANYTHING. The spreads on Illinois debt sales this week made it clear that the market views IL as MUCH worse than CA. One bright spot: Illinois passed a version of public pension reform in April. We may still be in a huge hole, but the pension reform bill is at least an attempt to stop digging. The CA assembly voted down a pension reform bill this week.
Prices for those bonds are going to go lower (probably a lot lower)and yields are going to climb. Even credit worthy & low risk municipalities are going to get dragged into the soup. They will receive lower bids for their bonds and pay higher rates than they otherwise should have - guilt by association. That opinion and 50 cents will get you a cup of coffee.
Jeff
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