Despite what is touted by the Federal Reserve (debt is good!), states and municipalities are drowning in debt. As are US households.
Moody’s Investors Service has downgraded the City of Hartford, CT’s general obligation debt rating to B2 from Ba2. The outlook is negative.
The Hartford General Obligation bond is at 6.971% based on $82.768.
The rating was placed under review for possible downgrade on May 30, 2017. The par amount of debt affected totals approximately $550 million.
The downgrade reflects the increased likelihood that the city will pursue debt restructurings to address its fiscal challenges. Last week, the city hired a law firm to advise it on debt restructurings. City management has made public statements indicating they will need to have discussions with bondholders about restructuring its debt regardless of the outcome of the state’s biennial budget as debt service costs escalate sharply leading to budget deficits over the next five years.
The rating also reflects the city’s challenging liquidity outlook in the current fiscal year and weak prospects for achievement of sustainably balanced financial operations. The city currently projects a fiscal 2018 deficit of $50 million and is seeking incremental funding from the state to close that gap. The state has not yet adopted a budget specifying aid for the city for the fiscal year beginning July 1. Even if the state’s biennial budget allocates sufficient funds to address the current and following years deficits and create a fiscal oversight structure, the budget is still unlikely to provide a pathway to structural balance over the longer term. City deficits, partially attributable to escalating debt service costs, are projected to grow to $83 million by 2023, making the city’s weak financial position vulnerable to further deterioration.
The negative outlook reflects the possibility that the city will restructure its debt in a way that will impair bondholders. The outlook also incorporates uncertainty over state funding in the current fiscal year and beyond and the associated impact on reserves, liquidity and the ability to achieve sustainably balanced operations.
That is the City of Hartford that is in trouble due to excessive debt relative to tax receipts. But what about US households?
The rising cost of living relative to wage growth is leading to excessive debt use to maintain a standard of living.
The NFIB Small Business Optimism Index for June fell slightly to 103.6, but remains above 100.
The NFIB Small Business Optimism Index remained below 100, indicating pessismism about small business growth, for most of Obama’s two terms as President, primarily because of the (Un)Affordable Care Act that placed staggering burdens on small businesses. There was hope that Trump and a Republican-held Congress could repeal the horrid Obamacare legislation, but that is looking less and less likely.
Obamacare was so poorly designed (it was really just a wealth transfer scheme from the beginning) that you see insurers pulling out of markets, leaving some counties with zero or 1 insurer.
Obamacare premiums have been soaring, depending on the state. Some states like California have seen increases of less than 10%, but some states like Arizona have seen increases in excess of 50%, not to mention massive increases in the deductible amount.
Since much of the burden of Obamacare falls on small companies (who rarely get representation or protection in Congress), I expect the optimism index to sink if Congress fails to repeal Obamacare (or at least returns Obamacare to a more free market approach).
For small businesses, Obamacare should be renamed “Obamasnare” since small businesses are snared in the healthcare trap.
But improving economic conditions and deregulation should improve small business model.
The Illinois House of Representatives suceeded in overriding the Illinois governor’s veto of the staggering state budget of $36 billion complete with tax increases. Personal state taxes will rise 32% and corporate income taxes will rise from 7.75% To 9.5%.
But despite a 32% income tax hike, the budget package is devoid of any structural spending reforms to slow growth in the cost of government: It lacks comprehensive property tax reform, major pension reform, collective bargaining reform, reforms to Medicaid and more.
The primary cause? Out of control public pensions.
Pensions will consume about a quarter of Illinois’s general fund this year. Nearly 40% of state education dollars go toward teacher pensions, and the state paid nearly as much into the State Universities Retirement System last year as it spent on higher education.
Anemic revenue and economic growth can’t keep up with entitlement spending. The state’s GDP has ticked up by a mere 0.8% annually over the last four years compared to 2% nationwide and 1.4% in the Great Lakes region. Since 2010 more than 520,000 Illinois residents on net have fled to other states.
Way to go, Illinois!
But Cook County leads Illinois in out-migration. Maybe they should change their name to “Cooked” County.
It’s now up to the state’s House of Representatives to hold its own override vote. The chamber plans to do so, but not on Tuesday, Steve Brown, a spokesman for Speaker Michael Madigan, said before Rauner’s veto was announced.
“We passed a bipartisan balanced budget for the first time in a couple of years,’’ Senate President John Cullerton, a Democrat, said on the floor Tuesday. “I’m certainly disappointed that he vetoed a balanced budget, but I’m glad that we were able to override him.’’
It is an odd time for Illinois Democrats to push for MOAR tax dollars to fund government. Particularly when Chicago wage growth is decllining.
And Illinois General Oblgation bond yields are the highest among states. They are over 150 basis points higher than the second highest state, New Jersey.
Declining population and wage growth are just the beginning.
Here is Governor Rauner trying (unsuccessfully) to reign in the crazy government spending in Illlinois.
In the emergency session, (Illinois Republican Governor) Rauner has agreed to hike the personal income tax rate to 4.95% from the current 3.75%. The corporate income tax rate will rise to 7% from the current 5.25% rate.