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Rating agencies weigh in on Quinn tax proposal

Friday, Apr 4, 2014

* From a Pat Quinn budget office press release…

Two bond rating agencies have released their reviews of Illinois’ finances ahead of next week’s scheduled sale of $250 million in General Obligation bonds that will finance roads, bridges and schools around the state.

While they say the state still has much work to do, they note the hard work the state government has done to cut costs, pay down old bills, and pass a comprehensive pension reform plan.

“We are pleased that the bond rating agencies recognize the difficult work the Governor and the General Assembly have done to cut spending, pay down the bills and pass comprehensive pension reform,” Acting Budget Director Jerry Stermer said. “It’s clear the rating agencies agree the Governor’s proposed budget would bring long-term fiscal stability to Illinois.”

* Not everything the raters had to say was positive, but considering how New York has trashed us in the past, I suppose beggars can’t be choosers. From Fitch

KEY RATING DRIVERS

BUDGET TEMPORARILY STABILIZED WITH TAX INCREASE: Temporary increases in both the personal and corporate income tax rates, coupled with statutory spending limits, have closed a significant portion of the structural gap in the state’s budget through the current fiscal year 2014.

NEED FOR LONG-TERM SOLUTION REMAINS: Due to the temporary nature of the enacted tax increases, the state will need to find a more permanent solution to the mismatch between spending and revenues. The Negative Outlook reflects the critical need to address this issue. The governor’s recommended budget for the coming fiscal year would make these tax increases permanent and provide a basis for the state to achieve fiscal balance.

LARGE BALANCE OF DEFERRED PAYMENTS REMAINS: The state has a large general fund accounts payable backlog, which although reduced still totaled $4.2 billion at the end of fiscal year 2013. The state prudently used higher than forecast income tax collections in fiscal 2013 to pay down a portion of the accounts payable balance.

LONG TERM LIABILITIES HIGH: The state’s debt burden is above average and rose during the recession with issuance for operational purposes. Continued borrowing is expected under the $31 billion capital plan. Further, unfunded pension liabilities are exceptionally high and are expected to remain so, even if pension reform survives legal challenge.

ACTION ON PENSIONS: Passage of pension reform legislation was a positive indication of the state’s willingness to take action on this complicated issue after many failed attempts. Legal protection of pension benefits is particularly strong in Illinois and, as expected, legal challenge to the reform has been filed.

ECONOMY STRONG BUT RECOVERY SLOW: The state benefits from a large, diverse economy centered on the Chicago metropolitan area, which is the nation’s third largest and is a nationally important business and transportation center.

RATING SENSITIVITIES

Maintenance of the ‘A-’ rating will require timely action in advance of the expiration of temporary tax increases in fiscal 2015. Deterioration in the state’s financial position, as evidenced by excessive use of non-recurring revenues or additional payment deferrals, would likely lead to a downgrade. In addition, stabilization of the rating will reflect the extent to which pension reform enhances the funding levels of the pension systems and controls the growing impact of pension payments on the budget.

* From Moody’s

SUMMARY RATING RATIONALE

The rating is supported by the state’s general obligation (GO) pledge. Despite substantial pension reforms adopted in December, Illinois remains the lowest-rated US state, at A3 with a negative outlook. Reform enactment launched the legal process that will determine whether constitutional protections prevent the state (and local units) from lowering liabilities through plan changes that affect existing pension participants. Courts may invalidate the reform package altogether, or block pieces of it. If allowed, the reforms could put Illinois on track to manageable long-term pension funding, although the retiree benefits burden will still be heavy compared with many other states. Also pressuring Illinois’ finances is a history of operating deficits, negative GAAP-basis fund balances and payment deferrals. As offsets to its challenges, Illinois has a large and diverse economy, with above-average wealth, and its powers over revenue and spending are strong. State law gives the highest priority to the payment of general obligation debt service. […]

OUTLOOK

Illinois’ negative outlook reflects our expectation that the state’s financial position could deteriorate further if the state’s 2011 tax rate increases are allowed to expire without offsetting steps next year. Pension reforms passed in December could improve the state’s credit standing, by reducing accrued liabilities, but they may be rejected after legal challenges from employees and retirees.

WHAT COULD MAKE THE RATING GO UP

–Implementation of a credible, comprehensive long-term pension funding plan, after favorable court ruling

–Substantial progress in reducing payment backlog, with adoption of a legal framework or plan to prevent renewed buildup of bills

–Establishment of a pattern of structurally balanced budgets

WHAT COULD MAKE THE RATING GO DOWN

–Failure to address impending revenue loss from partial sunset of 2011 tax increases

–Significant further deterioration in pension funded status

- Posted by Rich Miller        


6 Comments
  1. - RNUG - Friday, Apr 4, 14 @ 4:02 pm:

    WHAT COULD MAKE THE RATING GO UP

    –Implementation of a credible, comprehensive long-term pension funding plan, after favorable court ruling

    WHAT COULD MAKE THE RATING GO DOWN

    –Significant further deterioration in pension funded status

    Translation: if the ISC rules agaist pension reform, you’re in big trouble. Even if the ISC approves pension reform, you still need to properly fund it if you want better ratings.


  2. - wordslinger - Friday, Apr 4, 14 @ 4:05 pm:

    Rating agencies love new debt to rate and taxes to cover them.

    And yeah, they just said that if the tax increase isn’t extended, the state will get whacked.


  3. - Hit or Miss - Friday, Apr 4, 14 @ 4:10 pm:

    ===Due to the temporary nature of the enacted tax increases, the state will need to find a more permanent solution to the mismatch between spending and revenues. The Negative Outlook reflects the critical need to address this issue.===

    If the ‘temporary’ income tax increase is allowed to expire how will this impact the states bond rating? Will it lower the states bond rating yet again? Will it increase the states cost of barrowing yet again and if so at what cost (cost in dollars to the taxpayers)?


  4. - Mokenavince - Friday, Apr 4, 14 @ 4:17 pm:

    The rating agencies have spoken, the tax increase is here to stay.
    Rauner will have to deal with it. Lets hope he can fix it.

    We should be worrying about towns going bankrupt. I would not look for much help from our legislature. They have no will or way.


  5. - Arthur Andersen - Friday, Apr 4, 14 @ 4:25 pm:

    Good Lord, how long has Stermer been Acting Budget Director?


  6. - Walker - Friday, Apr 4, 14 @ 4:36 pm:

    At least the ratings agencies have noticed and reported that the total amount of past-due payables is being reduced. That means, of course, that the operating budget is producing a surplus to pay them down.

    Yet GOP candidates and spokesmen that I’ve read, (Murphy, Cross, Duffy, Sweeney, and others) claim that we have not even achieved a “balanced budget” because we still have any late payables at all. They must think we are all stupid.


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