In the wake of the most recent downgrades to Illinois’ credit rating, Governor Pat Quinn delayed a $500 million bond sale yesterday that would have been used for school construction and road improvements. The public statement was that the market was unsettled. The unstated logic behind the decision is that Illinois’ on-going pension fund problems must be addressed “soon” because it is causing constant and growing problems in managing the state’s finances, as exemplified by this delayed action.
Although “soon” is a vague term, it became clear that soon is later than February 11th. That was a date that Illinois labor leaders had hoped to hold a summit with state officials on how to resolve the pension crisis. It was strongly rebuffed yesterday by House Speaker Michael Madigan.
Although the elected officials are accountable to the voters of Illinois, they are also accountable to Wall Street, most notably Moody’s Investor Services, Standard & Poor‘s (S&P) and Fitch Ratings Services. They are three key ratings houses that valuate the fiscal strength and stability of state governments. As 2013 rang in, those agencies essentially put Illinois at rock-bottom with last Friday being an especially punishing day. On that day, S&P downgraded Illinois’ credit rating from A to A- with a “negative outlook”, the worst of all 50 U.S. states. Moody’s had already given Illinois that rank earlier in the year and didn’t budge on that opinion last Friday. The day before the S&P announcement, Fitch placed Illinois on a “negative watch” which portends a threat to lower the state credit rating even further under their protocols.
The culprits for the downgrades are totally connected. The state spends more than it takes in and has a huge pension liability. That causes the state to deal with a surging backlog of bills each month with no solution in sight. As this cycle continues, the operating debt grows, the pension liability grows and it makes Illinois a riskier entity for Wall Street to invest in and support.
As mentioned earlier, “soon” is a vague term. But, there has to be a day of decision not long after the General Assembly convenes on February 5th and Governor Pat Quinn providing his annual State of the State Address the next day. If not, a day of reckoning is upon the Land of Lincoln and that also may be “soon” - with the vagueness making that all the more scarier.