* My syndicated newspaper column covers some familiar territory for blog readers, but not necessarily for newspaper readers…
As you probably know already, Moody’s recently slapped Illinois with its worst credit rating of any state in the nation.
But while Moody’s report was damaging, S&P’s rating was far more negative about the state’s future.
Moody’s cited Illinois’ “weak management practices” and failure to implement any pension funding reforms and pay off its mountain of overdue bills as the major top reasons for the downgrade. But Moody’s moved Illinois from a “negative” to a “stable” outlook for the future.
A spokesman for Gov. Pat Quinn was quoted as saying that the Moody’s rating drop was an “outlier” because ratings agencies S&P and Fitch had decided not to lower the state’s credit rating. On the surface, that’s true. Underneath, not so much.
Trouble is, S&P’s rating contained much harsher language about Illinois’ credit future, the agency put Illinois on negative watch and it issued a sternly worded warning that the state is in danger of another ratings downgrade this year.
S&P focused mainly on the state’s overdue bills, which the governor estimated at about $7 billion. Without “meaningful changes” to balance the books, S&P warned, “we could lower the rating this year.”
The ratings agency also strongly warned against Quinn’s plan to use long-term bonding to pay off overdue bills.
“The outlook also reflects … the possibility that (Illinois) might issue a significant amount of additional debt as part of its effort to address the large accumulated budget deficit,” was the blunt message from S&P, adding that a downgrade could be triggered if “debt levels increase significantly.” In other words, pay off the past-due bills but do so without issuing “significant” new debt.
The state budget office seemed to be taken somewhat aback by this warning, saying that its capital markets manager would have to work with S&P on the structure of a bond plan that would “minimize impact on near-term cash flow.”
But backloading the repayment of such a plan would also likely create howls of protest. In any case, getting a three-fifths vote in both legislative chambers has been next to impossible and is now probably even more unlikely with S&P’s latest pronouncement.
All three ratings agencies also highlighted Illinois’ pension problems. Moody’s focused on funding the pensions, not with the ever-rising costs of paying off old debts to the pension funds. S&P worried about deteriorating “pension funding levels.”
But even with the credit downgrade and all the warnings, Illinois still managed to get the lowest interest rate on its recent tax-exempt bond sale since at least 1976, according to the budget office, which couldn’t find any records before that date.
How the heck did that happen?
Essentially, the strong demand for municipal bonds. Billions of dollars in muni bonds are maturing around the country this month while few are being sold, and investors continue to look for safe havens.
And the current record low interest rates (the rate on the latest federal issue was 1.9 percent) combined to make the bond sale highly attractive to investors.
The predictions of gloom and doom simply didn’t materialize. Illinois beat every published expectation.
Yes, the interest rate probably would’ve been even lower if the state had a better credit rating. And the state’s interest rate was about triple the spread between top-rated bonds and what Illinois got when compared to the state’s last tax-exempt bond sale in 2009. And nobody would say that this sale signals any particular strength in our state’s financial situation.
But as Quinn’s capital markets director told reporters, it would be pretty tough for any state to get an interest rate much lower than the 3.9 percent Illinois got. So, while the Moody’s downgrade did have an impact, it wasn’t nearly as negative as you might’ve thought by reading the editorials and political press releases during the past couple of weeks.
What this state needs is a few more solutions and a whole lot less rhetoric.
* Meanwhile, Finke pulls out an interesting nugget…
The Illinois Policy Institute last week released a copy of its Repeal the Tax Hike Pledge that it wants lawmakers to sign. In it, a lawmaker pledges to vote to repeal the income tax hike and not impose additional taxes in its place.
The number of signees isn’t overwhelming. Only eight senators (all Republicans) and 18 representatives signed it. Rep. Jack Franks of Marengo was the only Democrat on the list. Another 30 candidates for the Legislature also signed the pledge. All of them are Republicans.
So what about Springfield’s lawmakers? A lot of their constituents have state jobs that sort of rely on the state having adequate income. Are they on the pledge?
Sen. Larry Bomke, R-Springfield, is not a signer. Bomke is not running for re-election, but he said signing pledges for interest groups isn’t the way he approaches the job.
“It’s a rarity that I sign any of those pledges,” Bomke said. “You can’t sign a pledge today and know what’s going to happen two or three years from now.”
Rep. Raymond Poe, R-Springfield, said he opposes the income tax, but isn’t signing the pledge, either.
“I haven’t signed any pledges in the last 10 years,” Poe said. “It locks you in (even) in the case of any emergency. If you sign one 20 years ago, they still have them.”
Rep. Rich Brauer, R-Petersburg, however, did sign the pledge, even though he said signing pledges isn’t something he likes to do.
* And Kurt Erickson looks at the uphill climb facing pension reform…
There is no doubt the cost of providing pensions for Illinois’ public sector employees has become issue No. 1 when it comes to the state budget.
But with all members of the House and Senate up for reelection in 2012, don’t get too excited about any significant changes being made to the state’s pension systems.
Here are just a few reasons why this political hot potato may be too hot to handle:
A) Public sector employee unions are typically big-time campaign contributors to Illinois politicians.
B) Senate President John Cullerton’s legal staff has written up a pretty compelling analysis that says altering pension benefits of existing state workers is unconstitutional. He controls the majority in that chamber, which means its doubtful something like that would come up for a vote.
C) A plan to alter benefits for existing state workers would cost the state more next fiscal year than it would if lawmakers simply left the system alone.
* Related…
* Not a city employee, ex-Sen. Marovitz denied a city pension
* Editorial: Shifting tax burden not a pension fix
* Editorial: Where is the ’strong economy’ from tax hikes?
* Budget, pension top issues for both parties
* Libertyville officials stunned by resident’s casino proposal
* Tribune offers newsroom voluntary buyouts
* Among the Wealthiest 1 Percent, Many Variations
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- Shore - Tuesday, Jan 17, 12 @ 10:10 am:
I really hope the suburban republican candidates use the pension issue against the biss’s and whoever they find to replace garrett and may of the world next fall. It’s a really good issue to debunk the myth that people like Dr. Biss are really “independent fiscal conservatives” and wilmette and lake forest aren’t really interested in paying through the nose for this stuff.
- CicularFiringSquad - Tuesday, Jan 17, 12 @ 10:17 am:
Good story on MF Global chicago in WSJ….wonder when they get to CME
- Downstate - Tuesday, Jan 17, 12 @ 10:26 am:
I don’t understand why the IL Chamber doesn’t lead the effort to repeal the pension provision from the State Constitution. Put it to the voters!
- Highland, IL - Tuesday, Jan 17, 12 @ 10:33 am:
Nice pledge IPI, and more importantly signers. Where do you propose we start cutting after your forensic audit.
- Anonymous - Tuesday, Jan 17, 12 @ 10:39 am:
Wow, Marovitz is old school. And tone deaf. And greedy.
- carbaby - Tuesday, Jan 17, 12 @ 10:56 am:
After reading the Marovitz story, I have come to realize I was born into and/or married into the wrong family.
- Todd - Tuesday, Jan 17, 12 @ 11:10 am:
Downstate — it would take 36 votes in the senate, 71 votes in the house and thats not gong to happen. At is why the public sector unions opposed the consitutional convention
Anon– maybe losing his sugarmama has left him broke….
Still stuck in indiana
- mark walker - Tuesday, Jan 17, 12 @ 11:12 am:
Legislators should try to represent all their constitutents, as well as the whole state in some instances, to the best of their ability and judgment, not just the organizations who walk around with pledges in their hands. I have always viewed demands for written pledges from any partisan source as an insult to our process of government, and a cheap copout for weak politicians.
The recent tax hike is scheduled to expire anyway, without specific legislative and executive actions. Plans to avoid or support those future actions are what responsible advocates should be fighting about. The call for repeal right now is an obvious election-year political stunt.
- Rarely Posts - Tuesday, Jan 17, 12 @ 11:14 am:
I don’t get the argument about reducing benefits for state workers. The constitution says “Membership in any pension or retirement system of [state or local government] shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” So I get that we can’t take away benefits from retirees that they’ve already earned.
But look at the opposite point. Suppose the state last year hired a 25-year-old college grad and she has only contributed to the pension for one year. Is it the unions’ position that this creates a lifetime entitlement of benefits for services not yet performed? Surely the state could change to a defined contribution 401(k)-type plan for such a person. Otherwise, this is a breathtakingly broad (and generous) provision.
- Demoralized - Tuesday, Jan 17, 12 @ 11:52 am:
Rarely:
That’s exactly what the Constitution says.
- Rarely Posts - Tuesday, Jan 17, 12 @ 11:57 am:
Demoralized: So your reading would also mean that benefits cannot be reduced for employees not yet hired? After all, the constitution does not by its own terms limit the “no reduction of benefits” to current employees. But didn’t the IL legislature do exactly that a couple of years ago? That seems to me to be consistent with saying “benefits” means “benefits already earned”.
- Left Out - Tuesday, Jan 17, 12 @ 12:17 pm:
According to the editorial in The State Journal-Register “Propping up a dangerously flawed system with skyrocketing downstate property taxes is not the answer.”
We also know that many in the General Assembly are taking the ‘pledge’ against the income tax increase and/or are simply against the income tax increase and will not increase that again. The math also seems to point out that just cutting spending cannot solve the problem.
Looking at other possible taxes to increase to cover the increasing ‘mountain’ of pension bills there are few options left. Are we talking about an increase in the state sales tax? If not then what other options that can raise the required billions of dollars are left?
- wordslinger - Tuesday, Jan 17, 12 @ 12:18 pm:
The State of Illinois has never missed or even been late on a bond payment in nearly 200 years. What else do you need to know?
I don’t care about the rating agencies, anymore.
They gave us AAA subprime mortgage securities that fueled the bubble and wrecked the global economy. They downgraded the United States of America on the basis of a $2 trillion math error. Now they’re dumping all over Europe.
They don’t have any established or transparent criteria for their judgments. They’re as political as the next guy.
I think they’re a scam. I think they’re part of the pump-and-dump Wall Street culture that produces crazy wealth for the few and nothing but misery for the rest of us.
- HappyReturns - Tuesday, Jan 17, 12 @ 12:29 pm:
” After all, the constitution does not by its own terms limit the “no reduction of benefits” to current employees.”
Yes it does - it says ‘membership’. Only current employees have membership in the ret. system. That’s why they can, and did, for new employees starting after a certain date, create a new, lesser tier going forward.
- chad - Tuesday, Jan 17, 12 @ 12:41 pm:
Compliments to the Mayor for turning Marovitz down. It is about time City Hall indicated disapproval of this kind of practice. I hope a similar posture will be adopted by the universities in wake of the recently reported and overly-permissive pension benefits granted by ISU to persons with questionable employee status.
- Cincinnatus - Tuesday, Jan 17, 12 @ 12:54 pm:
Strategically and tactically speaking, I never will recommend that a candidate take anyone’s pledge simply because a pledge is a snapshot in time. Legislating requires taking into account the prevailing conditions and situations. Pledges offer no such flexibility, and can only be used against a candidate.
- Solutionsh - Tuesday, Jan 17, 12 @ 1:09 pm:
Eventually tax payers might just demand that Illinois become a right to work state. Then let workers decide if they want 401k’s.
- Plutocrat03 - Tuesday, Jan 17, 12 @ 1:16 pm:
Doesn’t Marioviz’s action appear to be an attempt to defraud the taxpayers?
If is not criminal, it should be.
- Anonymous - Tuesday, Jan 17, 12 @ 1:31 pm:
Although I’m against any attempt to “diminish benefits” of members in the pension systems, I do believe there numerous loopholes and weaknesses that could be addressed. How much money they might save? - I don’t know. One area in particular is calculating the pension amount based on so many previous years’ of salary. As I understand it, this calculation is not limited to just base pay, but includes overtime. This certainly inflates the pension amounts in areas such as public safety and technology jobs where overtime seems to be the norm. State personnel always warn employees not to expect that overtime will always be available, but then uses it in the pension calculation. I wonder what the savings might be if the pension calculation was only made against base salary amounts?
- Yellow Dog Democrat - Tuesday, Jan 17, 12 @ 4:07 pm:
@Shore -
Opposing unconstitutional changes to the public employee retirement system is the smart and “fiscal conservative” thing to do.
Here’s why:
1) If the General Assembly passes unconstitutional changes to the retirement system saving $500 million (for the sake of argument), the very next thing it will do is spend that money.
When the Supreme Court repeals the law three years from now, we’ll be another $1.5 Billion in the hole.
2) Every month we spend pushing unconstitutional pensions changes is a month that the employees and their employer AREN’T at the negotiating table trying to find a long-term solution to our budget challenges.
3) The Wisconsin approach poisons the well, making problem-solving all but impossible.
4) The governor’s lay-off freeze expires this summer, and the window of opportunity to make changes to the state workforce will close one way or the other.
As I said before, if I were advising the unions and the GOP kept big footing around in support of unconstitutional pension changes, I’d let them slip through and take my chances with the Illinois Supreme Court….the unions have seven precedents on their side.
But I’d also add a severability clause and put a whole bunch of stuff in there that the General Assembly ain’t gonna like…like a sunset on all tax expenditures and removing the end date for members of the GA to opt out of the pension system.
- Judgment Day - Tuesday, Jan 17, 12 @ 6:24 pm:
Word:
Wait until the next GASB ‘Statement’ comes out for States and units of local government to start compliance with (probably around end of 2012).
THAT will be the back breaker for the State of IL (if it is issued substantially as currently proposed).
It’s (supposedly) going to require five (5) year projections on both long term expenditures and revenues, specifically including such items as long term indebtedness, pension expenditures and obligations, and non-pension retiree financial obligations. It also would (apparently) apply to projecting revenue sources and trends over a five (5) year period.
Harsh. Particularly for the State of Illinois and the City of Chicago.