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*** UPDATED x5 *** Fitch switches Illinois to “negative” outlook, gives state six months to fix problem

Friday, Jan 11, 2013

* From Fitch

Fitch Ratings has placed the ‘A’ rating on the general obligation (GO) bonds of the State of Illinois on Rating Watch Negative. The rating action affects approximately $26.2 billion in outstanding GO bonds of the state. Ratings linked to the state GO rating, listed at the end of this release, have also been placed on Rating Watch Negative.

The Rating Watch Negative reflects the ongoing inability of the state to address its large and growing unfunded pension liability, most recently through the failure to pass pension reform in the ‘lame duck’ portion of the 97th general assembly legislature that ended on Jan. 8. Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable. The Rating Watch Negative will be resolved after an assessment of the extent to which the state takes action within the next six months that limits the impact of pension payments on the budget while bolstering pension funded levels. Failure to achieve meaningful results would lead to a downgrade of the rating.

Illinois’s long-term liabilities, particularly pension liabilities, are very high for a U.S. state. As of June 30, 2012, the unfunded actuarial accrued liability was reported at $94.6 billion, resulting in a 40.4% reported funded ratio. This large unfunded pension liability is despite the issuance of pension obligation bonds and passage of bipartisan comprehensive pension reform affecting new employees in March 2010.

Annual pension funding requirements have been increasing significantly and growing pension payments are crowding out other expenditure growth and absorbing revenue growth. Pension payments from the general fund increased $965 million to $5.1 billion in 2013, an increase of 23%, reflecting in part the use of more conservative investment return assumptions. Fitch notes that even these large payments, which consume a well-above-average percentage of the state’s general fund budget, are based on statutory formula and are below the actuarially required contribution (ARC).

Several reform proposals have been presented by the governor and various legislators that would adjust benefits for existing employees, increase employee contributions, limit cost of living increases, and increase the retirement age. Other proposed structural changes to the pension program include shifting some responsibility for employer contributions to school districts and state universities and establishing a 30-year funding schedule based on the ARC that aims to reach 100% funding by 2042. Under current statute, annual contributions are designed to reach 90% funding by 2045. Fitch believes that enactment of reform is critical to the long-term stability of the state’s fiscal position, although legal protection of pension benefits is particularly strong in Illinois and Fitch expects any changes to be litigated.

The ‘A’ rating on Illinois’s GO bonds reflects the state’s broad based and diverse economy offset by the challenges presented by a budget that is balanced through significant temporary tax increases, high long-term liabilities including pensions, and a large accounts payable backlog that reflects the payment deferrals the state used to manage its operating deficit through the downturn.

The state’s GO bonds benefit from an irrevocable and continuing appropriation for all GO debt service, and continuing authority and direction to the state treasurer and comptroller to make all necessary transfers from any and all revenues and funds of the state. The state funds debt service in advance by setting aside 1/12 of principal and 1/6 of interest every month for payments due in the ensuing 12 months. [Emphasis added.]

That’s not nearly as bad as it could’ve been, but there are other ratings agencies.

*** UPDATE 1 *** From the governor’s office…

“The Fitch report speaks for itself. This should be required reading for every member of the new General Assembly. We have an emergency and it’s not going away.”

*** UPDATE 2 *** Sun-Times

The move may not have a direct impact on the state’s finances and posts “very minimal risk” to existing state bond holders, but it ultimately could foreshadow higher borrowing costs the next time Illinois goes to market for long-term loans, a company spokeswoman said.

“The immediate result, to be honest, is probably nothing. It doesn’t affect what they’re doing on a day-to-day basis,” Fitch analyst Karen Krup told the Chicago Sun-Times. “But for direct impact on the state, when they try to go to market the next time, there could be implications on borrowing costs.”

*** UPDATE 3 *** From Leader Tom Cross…

“Fitch’s downgrade of our bond rating is embarrassing and may cost the state more money—money that we clearly do not have. How many more times do we have to be downgraded to prompt action in the General Assembly? I have worked and will continue to work with other members in the House and Senate to pass meaningful pension reform.”

*** UPDATE 4 *** Treasurer Rutherford…

“Fitch Ratings announced that the agency has placed Illinois’ general obligation bonds rating on negative watch. Fitch decided to do this because of the state’s inability ‘to address its large and growing unfunded pension liability.’ The next step could potentially be the downgrade of the state’s credit rating from Fitch. Failure to enact pension reforms will eventually bring Illinois to its financial breaking point, and it will be worse than any fiscal calamity we have seen thus far in this state. Our state’s credit rating cannot afford to take another hit.”

“Furthermore, it has now been two years since Governor Pat Quinn’s 66% income tax hike was passed, and though it was billed as a measure that would help solve the state’s financial problems, money matters in Illinois have only gotten worse. On January 11, 2011, the state’s backlog of bills was reportedly $8.5 billion. Today the state owes vendors nearly $9 billion dollars.”

“In the past decade, the state’s bonded debt has nearly tripled. Illinois’ debt is colossal and growing– our debt obligations now exceed $200 billion. It is estimated that the failure to address the state’s pension liability is costing the state at least $17 million per day. It is beyond irresponsible to let this continue. The state needs to reign in the pension escalation and not use long-term borrowing as a ‘solution’ to this problem.”

Also, the governor was asked about Fitch’s move today. Raw audio…

*** UPDATE 5 *** Rep. Elaine Nekritz and Sen. Daniel Biss…

“This announcement just confirms what we have feared and warned about: our state finances are in real trouble. We must act quickly and decisively to address the pension problem and send a strong message that Illinois is serious about getting its fiscal house in order for the long term.”

- Posted by Rich Miller        


27 Comments
  1. - 47th Ward - Friday, Jan 11, 13 @ 12:00 pm:

    I went to see Dr. Fitch, He told me I had six months to live. When I couldn’t pay the bill, he gave me another six months.


  2. - RNUG - Friday, Jan 11, 13 @ 12:06 pm:

    Two immediate thoughts:

    The state has 6 more months to stall.

    By specifically identifying the tmeporary income tax increase as one of the tools currently being used to manage things, are they hinting to make it permanent?


  3. - Makandadawg - Friday, Jan 11, 13 @ 12:07 pm:

    Once again the problem is defined as “ongoing inability of the state to address its large and growing unfunded pension liability”. This does not mean my pension benfits are broken and need to be reduced. This means the state legislature is broken and needs to be fixed


  4. - Loop Lady - Friday, Jan 11, 13 @ 12:09 pm:

    Has Madigan seen this? Is it finally time for him to rescue us from himself and others?


  5. - Crime Fighter - Friday, Jan 11, 13 @ 12:15 pm:

    If the money was just paid back wouldn’t this go away?
    How much credit do the ratings agencies give for the absence of a service tax in a service economy?


  6. - Arthur Andersen - Friday, Jan 11, 13 @ 12:18 pm:

    47th, excellent!


  7. - RNUG - Friday, Jan 11, 13 @ 12:20 pm:

    Crime Fighter,

    Yes, but it will take a 30 year diet to do so …


  8. - Jimmy - Friday, Jan 11, 13 @ 12:22 pm:

    I lot better than I expected. Maybe they feel optimistic about reform in the upcoming regular session?


  9. - Soccertease - Friday, Jan 11, 13 @ 12:23 pm:

    Nekritz to Fitch: “Hey, how about giving IL a two-minute-warning or whatever you guys call it so I can mess with State employees and retirees a little more?”


  10. - Crime Fighter - Friday, Jan 11, 13 @ 12:39 pm:

    RNUG - Thanks. OK, I’m in! We need a 30 year ramp diet and a service tax to deal with the tab from the last 30yrs of overindulgence.
    I won’t get my yacht polished as often and will cut down on meetings with my wealth management consultants.(Snark of course)


  11. - Small Town Liberal - Friday, Jan 11, 13 @ 12:54 pm:

    I wish I had a job where I could make mistakes worth hundreds of millions of dollars and still have the authority to give deadlines to an entire state.

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ajs7BqG4_X8I


  12. - iThink - Friday, Jan 11, 13 @ 1:00 pm:

    == legal protection of pension benefits is particularly strong in Illinois and Fitch expects any changes to be litigated==

    Yup. Perhaps Fitch has some constitutional ideas to fix this mess; our inept elected officials sure don’t.


  13. - Meaningless - Friday, Jan 11, 13 @ 1:05 pm:

    Easy solution to make Fitch happy. Fix the pension debt ramp and increase revenue. Employees contribute 2% more, close corporate tax loopholes, and revise the state sales tax to include more services. What’s so difficult?


  14. - western illinois - Friday, Jan 11, 13 @ 1:06 pm:

    Dear Fitch
    Illinois bond debt is a bit high I think we should resturture it in a few months(means we pay less) But your bondholders might sue sinnce bonds like pensions are a contract.
    BTW Where were you in 2008?
    Do you have the abilty to primary anyone?
    Where were you in 1970?
    For all those who call use Greece our debt would have to be 120%v of GDP which for Illinois would be about 600 Billion Dollars


  15. - Rich Miller - Friday, Jan 11, 13 @ 1:10 pm:

    ===Easy solution to make Fitch happy. ===

    If it was so easy, it would’ve been done by now.


  16. - western illinois - Friday, Jan 11, 13 @ 1:32 pm:

    Nothing is easy even if there is an agreemnet with the unions on a 2% increas,which i think would do maore than Cullertons”choice”a NUG could still sue and might very well win


  17. - Cook County Commoner - Friday, Jan 11, 13 @ 1:39 pm:

    I think our legislature doesn’t worry too much about the downgrade. There are so many yield hungry investors out there that bids on debt will not suffer much. Besides, a lot of other states are catching up to Illinois with their own version of the fiscal flu. This may help to keep the bond prices up.

    The more important issue concerns staff slashing at state agencies like the Dept of Financial and Professional regulation, as reported in today’s Tribune. Related to pension and other fiscal presuures? Probably.

    How many truly valuable government services will be compromised before IL state and local governments take meaningful action ?


  18. - bourbonrich - Friday, Jan 11, 13 @ 1:52 pm:

    If we accept the concept that retirement benefits will not be touched and if there is no increase in revenues, then aren’t the choices either fewer state employees or reduced salaries?


  19. - Liberty_First - Friday, Jan 11, 13 @ 2:14 pm:

    I have a better idea. Default on bonds to pay pensions.


  20. - Meaningless - Friday, Jan 11, 13 @ 2:37 pm:

    re … response to easy solution. I think we all know why the practical and common sense solutions are not even on the table at this time ($$$$$). But remember … everyone also knows that cutting pensions will not even be a good band-aid and besides being unconstitutional, would / will have a dramatic negative impact on Illinois’ economy.


  21. - Joe M - Friday, Jan 11, 13 @ 2:49 pm:

    ===If we accept the concept that retirement benefits will not be touched and if there is no increase in revenues, then aren’t the choices either fewer state employees or reduced salaries?

    It would seem a possibility that reduced salaries would get tangled up in contract law lawsuits. And Illinois already has the fewest number of state employees per capita out of all 50 states - so kind of hard to cut there too.


  22. - Norseman - Friday, Jan 11, 13 @ 2:51 pm:

    === Fitch believes that enactment of reform is critical to the long-term stability of the state’s fiscal position, although legal protection of pension benefits is particularly strong in Illinois and Fitch expects any changes to be litigated. ===

    And what if the litigation is successful because of the “strong” protection?


  23. - dupage dan - Friday, Jan 11, 13 @ 3:02 pm:

    Dr Fitch told me I am terminally ill. I asked for a second opinion. He told me I am ugly, too.


  24. - Anonymous - Friday, Jan 11, 13 @ 3:16 pm:

    Cross: “I have worked and will continue to work with other members in the House and Senate to pass meaningful pension reform.”

    It would be real nice and possibly helpful if he and the rest would work with ALL the STAKEHOLDERS here.


  25. - props - Friday, Jan 11, 13 @ 3:32 pm:

    Well played 47th Ward, well played.


  26. - western illinois - Friday, Jan 11, 13 @ 3:50 pm:

    We did have one downgrade and because of the afformentioned yield hungry investor …nothing much happened


  27. - Anyone Remember? - Friday, Jan 11, 13 @ 4:53 pm:

    Other states have “fixed” their pension problems by doing George Carlinesque seven dirty word things to their employees and retirees. However, none of them have the Illinois Constitution’s guarantee. What other states have done should be unconstitutional here. There’s the rub.


Sorry, comments for this post are now closed.


* Afternoon updates
* Hospitals back removal of income tax sunsets
* The other strategy
* *** UPDATED 1x *** Quinn onboard; Rauner latches onto term limits proposal
* Because Illinois is a real battleground state
* Quinn dodges Rahm question on "Morning Joe"
* Morning Shorts
* Yesterday's blog posts

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