The state of Illinois bond rating is now six levels below AAA with the latest action by Standard & Poor's Ratings Services. The bond rating agency lowered its rating on Illinois' general obligation (GO) bonds to 'A-' from 'A'. At the same time, Standard & Poor's assigned its 'A-' rating to the state's $500 million GO bonds of February 2013.
The ratings agency said that "the outlook is negative."
In more ways than one.
Last August, Illinois Governor Pat Quinn called the state legislature into a special session with the specific purpose of voting on the issue of "pension reform."
"The downgrade reflects what we view as the state's weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions," said Standard & Poor's credit analyst Robin Prunty.
At the time, Governor Quinn said that "the current unfunded pension liability of more than $83 billion is unsustainable and costs taxpayers millions of dollars every day it goes unaddressed." In addition, Governor Quinn said that the "2013 budget is $33.7 billion, approximately 15 percent of which will go toward pensions alone."
What that means is that with the issue unresolved, an increasing percentage of the budget will go toward financing pensions, and less of the state budget toward critical state programs such as education, medicaid, social services, and funding of many other programs.
The aggregate pension funded ratios on an actuarial basis declined to 40.4% at fiscal year-end 2012, compared with 43.4% in fiscal 2011, said S&P. Based on the state's current projections, the funded ratio will decline further to 39% in fiscal 2013. The continued decline in pension funded ratios is due in part to contributions below the annual required contribution, investment returns below assumptions, and lower investment return assumptions.
While legislative action on pension reform could occur during the current legislative session and various bills have been filed, S&P is not optimistic since they said that it "will be difficult to achieve given the poor track record in the past two years."
S&P also said that legislative actin could still result in a "risk based on the potential for legal challenges, and it could be several years before reform translates into improved funded ratios and budget relief."
It also pointed out that tax increases will expire in "fiscal 2015 and a high level of accumulated payables, combined with the more typical pressures facing the state sector in terms of a slow economic recovery, potential federal fiscal consolidation, and health care reform implementation."
Key factors supporting the 'A-' ratings include what S&P views:
- Deep and diverse economy, which is anchored by the Chicago metropolitan
- Above-average income levels;
- Almost unlimited ability to raise tax and other revenues due to its
sovereign powers and the absence of constitutional revenue-raising
- Well-established priority of payment for debt service established by
- Ability to adjust disbursements to stabilize cash flow and to access
substantial amounts of cash reserves on deposit in other funds for debt
service, if needed, and for operations if authorized by statute; and
- Recent efforts to improve structural budget balance and to enhance
financial and budget management capabilities.
Offsetting these generally positive credit factors are what S&P consider:
- Sizable budget-based deficits for fiscal years 2009 through 2012 despite
revenue-enhancement measures implemented in 2011 that we view as
- A historically large generally accepted accounting principles general
fund balance deficit;
- Large unfunded actuarial accrued liability (UAAL) for its five pensions;
- A moderately high and growing debt burden due to debt issuance for
current pension contributions in fiscal years 2010 and 2011, and the
approved long-term capital program.
The negative outlook reflects the view of S&P "as the range of challenges Illinois faces that will require legislative consensus and action. We believe the outcome of deliberations relating to pension reform and the expiration of current personal and corporate income tax rate increases on Jan. 1, 2015, along with other normal budget pressures, could have a profound effect on the state's budgetary performance and liquidity over the two-year outlook horizon."
S&P also warned that inaction could result in a "fall into the 'BBB' category, lack of action on pension reform and upcoming budget challenges could result in further credit deterioration, particularly if it translates into weaker liquidity."
In other words, the longer the state legislature waits to act, the higher the risk of permanent harm to the state of Illinois and its taxpayers.
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John is the author of an award-winning book, the 2010 Winner of the USA National Best Book award for African American studies, published by The Elevator Group Mr. and Mrs. Grassroots: How Barack Obama, Two Bookstore Owners, and 300 Volunteers did it. Also available an eBook on Amazon. John is also a member of the Society of Midland Authors and is a book reviewer of political books for the New York Journal of Books