Week in Review for 6/6/16 - 6/10/16

Budget – Ratings Cut

Moody’s, Standard & Poor’s cut Illinois credit rating one notch. The Moody’s Investors Service ratings cut, from Baa3 to Baa2, together with the Standard & Poor’s ratings downgrade to BBB-plus, brings Illinois one notch closer to “junk bond” status. As Illinois’ credit rating declines, Illinois taxpayers must pay higher interest rates. In addition, the State faces the prospect of substantial supplemental penalties should credit ratings further decline, with borrowing covenant clauses in effect in which the State promised to lenders who have already lent the State money that it would maintain the value of its debt at investment-grade levels.

Moody’s accompanied the ratings cut with a reaffirmation of its longstanding “negative outlook” statement on Illinois general-obligation (GO) debt, signaling the firm’s belief that further ratings cuts may be imposed on the Prairie State in the relatively near future. Moody’s Investors Service and Standard & Poor’s are the world’s #1 and #2 providers of credit ratings to public and private entities. A third firm that competes with and operates in close affiliation with Moody’s and Standard & Poor’s, Fitch Ratings, may also soon cut its ratings of Illinois debts.

The credit ratings posted by Moody’s and its competitors are meant to gauge the probability that a piece of debt paper will go into default. Credit rating cuts have preceded many of the major public-sector defaults of the recent past, including the city of Detroit and the commonwealth of Puerto Rico. Governor Bruce Rauner responded to the debt downgrade on Thursday, June 9, with a call for “real structural changes to repair the years of unbalanced budgets and deficit spending.”

Budget – New Illinois Debt
$550 million in new Illinois debt scheduled to head to market. The underwriting event, scheduled for June 16, came as the Democrat-controlled General Assembly missed its second successive annual budget deadline. After failing to pass a constitutional balanced budget for FY16, the Democrat-controlled Illinois General Assembly neglected to enact any budget at all in May 2016 for FY17. FY17 starts on July 1, 2016.

General obligation (GO) bonds, such as the bonds scheduled to be sold in mid-June, are backed by the full faith and credit of the State of Illinois. Serious concerns about the financial probity of Illinois’ current operations, particularly the current budget impasse, have placed this faith and credit into question. After this week’s Moody’s credit rating cut, Illinois’ GO debt is currently rated at Baa2 by Moody’s Investor’s Service, only two notches above “junk bond” level.

The executive in charge of municipal bond investments world’s largest money management firm, BlackRock, has advised his colleagues to boycott further access by Illinois to the credit markets. While the scheduled June 16 bond underwriting event is scheduled to raise money for capital improvements (such as transportation roads and bridges) rather than the operating-fund situation that is at the heart of the current budget impasse, the budget situation is already affecting Illinois’s GO status. Illinois currently must pay GO interest rates that are 183 basis points (1.83%) higher than the rates paid by neighboring states, such as Indiana, that are rated triple-A. These extra costs are passed on to taxpayers and motorists in the form of higher taxes and in the form of construction project delays.

Budget – Schools
House Republicans continue to push for 2016-17 school funding. The House Republican Caucus has been working with all sides, including Governor Rauner and rank-and-file Democrats, to ensure that funding is in place for Illinois public school districts to open on time this fall. Democrats, especially in the Illinois House, have continued to block appropriations for Illinois schools to operate in 2016-17.

House Republican Leader Jim Durkin filed legislation prior to the May 31st session deadline to provide FY17 funding for Illinois elementary and secondary education. House Republicans see this measure as “taking K-12 schools out of the budget crossfire.” The bill would take effect immediately, but its key impact would be felt in FY17 covering the 2016-17 school year. While the General Assembly could consider HB 6583 at any time, most observers believe that it will become increasingly essential to pass some sort of school funding bill prior to the next calendar deadline – the start of the FY17 fiscal year on July 1, 2016.

General Assembly – House Session Cancelled This Week
Planned emergency House session cancelled this week. The special session day, scheduled for Wednesday, June 8, would have helped the Illinois House deal with the increasingly urgent challenges created by the approaching end of FY16 and start of FY17. Illinois will soon start its second 12-month period without a constitutionally balanced plan to control State spending. In the absence of a balanced budget and without line-item appropriations, some Illinois spending levels are controlled by court orders, consent decrees, and continuing appropriations. Spending continues in these areas and, in some cases, has even sped up – even though the State faces multi-billion-dollar deficits.

At the same time, other areas of Illinois spending have been severely cut back because no authority exists to transfer money out of any State account in these areas. Examples include many items of community-oriented social work, grants to institutions of higher education, and MAP student aid grants to Illinois college students. Soon, Illinois elementary and secondary education will join these no-spend areas. The June 8 session day would have given advocates for these shut-out spending areas and publicly funded programs a chance to be heard, but the special session day was cancelled by order of the Office of the Speaker of the House. Speaker Madigan’s move marked another step in his increasingly acrimonious relations with Governor Rauner and other state leaders. The Governor responded to Madigan’s move by accusing the House Democratic leader of “stalling” on the budget talks.

Illinois has operated without a constitutionally balanced budget to control spending since July 1, 2015, and has built up a backlog of unpaid bills that Comptroller Leslie Geissler Munger estimates at more than $7.3 billion. In addition, Munger warned again this week that failure to pass a budget bill for FY17 will lead to suspensions of State payments to 9-1-1 centers, institutions of higher education, and lottery winners.

Economy – Fortune 500
“Fortune” magazine names 37 of Illinois’ publicly-traded companies to Fortune 500 list. The list of U.S. nationwide firms, classified by gross revenues, is headed by retailer Walgreens Boots Alliance. Walgreens Boots, which has the 19th-highest revenues of any U.S. public-traded firm, in based in suburban Deerfield near Chicago. Walgreens’ status was helped by its recent merger with the European pharmacy/general retailer Boots. Boeing, based in downtown Chicago, scored second among Illinois firms with an overall standing of 24th.

Downstate firms on the Fortune 500 list were headed by State Farm Insurance (#35) and Caterpillar (#59). Four new Illinois entrants to the Fortune 500 list for 2016 were Univar, Baxalta, Arthur J. Gallagher, and TDS. One of these firms, Baxalta, was acquired by a European firm after the finalization of the list, and presumably will not return to the list in 2017. Most of the Illinois Fortune 500 firms are located in the city of Chicago or in surrounding suburbs. Some Illinois firms that emphasize intellectual property management and rights, such as fast-food franchisor McDonald’s, do not specialize in gross sales and are thus not highly ranked on the Fortune 500 list.

Energy – Caterpillar Inc.
Peoria-based industrial firm makes push in solar power. The move by Caterpillar marks another step by the firm to increase its market presence in the developing world. Caterpillar intends to continue to specialize in the development of power networks to be located in sites that are isolated from conventional electrical grids. Caterpillar, already a major supplier of heavy equipment to isolated infrastructural nodes such as the iron mines of northwestern Australia, wants to help operators of these sites develop a partial alternative to expensive diesel fuel for electrical power.

Calling these new emplacements “microgrids,” Caterpillar wants to assure potential customers that the solar power these sites will generate will be as reliable as diesel-powered electricity. A two-pronged system that includes both solar panels and diesel-fueled generator sets will offer potentially less-expensive power that will be available on a 24/7 basis. For many decades, Caterpillar has sold diesel generator sets for potential use in off-grid environments, and expects to continue to do so. A consultant has told Caterpillar that “remote power platforms” for off-grid electricity represents a $10.9 billion worldwide market. Caterpillar this spring installed a 500-kilowatt solar panel array at its proving ground near Tucson, Arizona, to develop and test its solar power and hybrid-power infrastructure offerings. The array was powered up in April.

Environment – O’Hare Airport Noise
More than 500,000 noise complaints logged from addresses around O’Hare Airport. The complaint log covers the first four calendar months of 2016, ending April 30, 2016. The O’Hare Noise Compatibility Commission, which monitors noise complaints, says that relevant panels received approximately 537,000 complaints during this 120-day period. Recipients of the complaints included the city of Chicago’s Department of Aviation, the governing body that operates O’Hare Airport.

Airlines that take off from and land their planes at O’Hare are required to acquaint themselves with O’Hare Airport’s “Fly Quiet” program, a series of guidelines overseen by the Chicago Aviation Department that are intended to reduce noise impacts on people and property around the airport – especially during nighttime hours. However, critics point out loopholes in the ability of the current program to effectively reduce noise. In particular, the “Fly Quiet” guidelines are voluntary. Air traffic controllers are required to make the safety of air operations their top priority and critics say too little attention has been given to questions of how to bring together goals of safe air operation and quieter takeoffs/landings. In particular, encouraging older/slower/noisier planes to use airports that are less busy could offer an ongoing way out of this dilemma. Making O’Hare Airport an airport that is maximally friendly to newer and quieter aircraft and aircraft engines could simultaneously improve the airport’s noise profile and safety standards.

Housing – Home Values
Illinois continues to have a relatively high number of under-water mortgages. A home where the occupant owes a mortgage debt that is greater than the market value of the property is said to be “underwater.” As of March 31, 2016, approximately 8% of all U.S. house owners (4 million homeowners) are in this position. Under-water homeowners have two pathways to recover positive equity in their homes: firstly, by continuing to pay off the mortgage in times of market stability, they can reduce the debt down to a level that is lower than the market value; and secondly, they can work with their neighbors to increase community standing and achieve a positive rate of return on the market value of their home.

As part of the recovery from the 2008 market crash, real estate values have increased much faster in some parts of the United States than in Illinois. In Illinois, 14.4% of all homes remain under water, making the Prairie State the 3rd-highest under-water state in the U.S. Illinois’ status is reduced by the relatively high percentage of homes in greater Chicago (16.7%) with negative equity, reflecting a sub-optimal ability of Chicago-area homes to regain the market levels reached during the 2000s housing boom.

States and metropolitan areas performing better than Illinois are located in sections of the U.S. that are undergoing a new housing boom in the 2010s. Cities where virtually all of the homes (98% or more) are in the black include San Francisco, Houston, and Denver. Cities with more than 15% of the houses in the red include Las Vegas, Miami, and Chicago.

Illinois State Museum – Reopening Plans
State Museum facilities look forward to possible July 2 reopening. Reopening plans include both the primary Illinois State Museum in downtown Springfield, and the satellite Dickson Mounds complex near Lewistown in west-central Illinois. The Illinois State Museum contains exhibits of natural history, ethnology, and human culture to tell the story of Illinois to visitors from around the globe. Many of the exhibits are child-friendly or designed for children. Due to budgetary constraints, the museum temporarily closed to public visitation in October 2015. It is expected to charge an admission fee of $5 to adults, with admission free to children, when it reopens.

A burial mounds complex, Dickson Mounds is acclaimed for its presentation of what is known of the way of life of Illinois River-based Native Americans who lived up and down the river during its wetlands years prior to European arrival. Springfield’s Rep. Sara Wojcicki Jimenez and Rep. Tim Butler have worked with the lawmaker who represents the Lewistown area, Rep. Mike Unes, in finalizing the reopening of the museum centers. A General Assembly panel, the Joint Committee on Administrative Rules (JCAR), will hear a segment of the reopening plans at their Chicago meeting on Tuesday, June 14.

Summer in Illinois
Spring planting season ending on high note. The most recent crop report from the U.S. Department of Agriculture (USDA) indicates that seed has been planted in 97% of the Illinois acreage intended for corn, and sprouts have emerged in 92% of the acreage. For beans, the numbers are 81% planted and 66% emerged. Crop condition is classified as 76% good-to-excellent, 19% fair, and only 5% poor to very poor. Poor conditions are concentrated in some fields in rain-soaked Southern Illinois. The good growing conditions follow conscientious work by Illinois farmers to prepare for spring planting, including checking soil moisture, performing spring fieldwork, and application of fertilizer. The cost of nitrate-based fertilizers continues to be a significant impact upon Illinois crop profitability and farmland values, with fields assigned to corn/corn rotation requiring as much as 254 pounds of nitrogen-based fertilizer per year. Illinois’ agricultural scientists continue to study ways to reduce nitrogen application requirements on farm fields without impacting yields.

Route 66 heritage in Bloomington-Normal. America’s Route 66, on its way from Chicago to St. Louis, passes through Downstate Illinois. The Mclean County Museum of History (the former county courthouse in downtown Bloomington), has refitted the first floor of the museum into the new “Cruisin’ With Lincoln on 66” exhibition space. Multimedia displays tell the story of the Chicago-St. Louis “Alton Railroad” corridor, developed by lawyer Lincoln and other local businessmen and professionals in the 1850s, and how the corridor of development created by the railroad created an infrastructure-rich space for highway development in the early 20th century. Route 66 pilgrimages are a key item of life in Central Illinois in summer and fall. This will be the first full year of operation of “Cruisin’ With Lincoln,” which opened in mid-2015. Other Route 66 museum spaces pay tribute to the historic road in Joliet and Pontiac.

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