* 2:12 pm - The firm says that the failure to deal with “pension under-funding” and address its mountain of past-due bills during the veto session led to the downgrade. From the ratings agency…
SUMMARY RATING RATIONALE
The downgrade of the state’s long-term debt follows a legislative session in which the state took no steps to implement lasting solutions to its severe pension under-funding or to its chronic bill payment delays. Failure to address these challenges undermines near- to intermediate-term prospects for fiscal recovery.
It remains to be seen whether the state has the political willingness to impose durable policies leading to fiscal strength, though in the recent past it has reached consensus on difficult decisions, such as temporary income tax increases enacted last year that stabilized state finances and reduced the state’s need for non-recurring budgetary measures. Illinois retains the sovereign revenue and spending powers common to all U.S. state governments. These powers, along with Illinois’ legal provisions giving G.O. debt service priority over other state spending, support the move to a stable outlook.
…Adding… California appears to be at A1, so it looks like we may have the lowest rating in the nation, at least with Moody’s. However, Fitch and S&P still have us higher. Word is that S&P’s rating won’t change. Stay tuned.
*** UPDATE: 3:04 pm *** As expected, S&P has decided not to change Illinois’ bond rating, according to its website. Click here to see the IL ratings.
*** UPDATE: 3:11 pm *** More from S&P…
The negative outlook reflects what we view as the state’s large accumulated deficit and improved but still elusive structural budget balance despite significant revenue enhancement for the current financial plan period. The accumulated deficit continues to pressure the state’s overall financial condition and liquidity in our view. If Illinois does not make meaningful changes to further align revenue and spending and address its accumulated deficit (accounts payable and general fund liabilities) for fiscal years 2012 and 2013, we could lower the rating this year.
The outlook also reflects ongoing weakness in the state’s pension funds and the possibility that it might issue a significant amount of additional debt as part of its effort to address the large accumulated budget deficit. A downgrade could also be triggered if pension funding levels continue to deteriorate or debt levels increase significantly, which would pressure the state’s near-term financial performance.
If pension funding levels stabilize and revenues and expenditures are successfully aligned in the next year, thereby stabilizing Illinois’ finances, we could revise the outlook to stable. We do not believe there is upside potential to the rating in the next year given the range of budget and liability challenges the state faces. [Emphasis added.]
*** UPDATE: 3:38 pm *** From Gov. Quinn’s office…
We are encouraged both Fitch and Standard & Poor’s affirmed the state’s long term bond rating. These actions indicate the state has taken positive steps to address its decades old budget challenges by reducing spending and enacting Medicaid, pension, worker’s compensation and education reforms.
The downgrade by Moody’s underscores, that although the state has taken positive steps toward fiscal stability, as Standard & Poor’s and Fitch indicate by holding our rating steady, swift bi-partisan action to implement further cost reductions and reforms in the upcoming legislative session are needed to stabilize the budget.
All three rating agencies as well as the investors in our bonds are clearly telling us we need more Pension reform. Moody’s clearly acknowledges that prior administrations left pensions underfunded creating this huge unfunded liability we face today. We have already implemented pension reforms that will save taxpayers over $200 Billion and just this week, Governor Quinn signed into law additional reforms to stop pension abuses. More needs to be done.
We also need to pay our bills and we continue to call on the General Assembly to embrace the Governor’s plan to refinance this debt that has been created over decades of fiscal mismanagement in order to get these bills paid immediately.
*** UPDATE: 4:06 pm *** US Sen. Mark Kirk…
“Moody’s decision to downgrade Illinois debt echoes the judgment of my Sovereign Debt Advisory Board report last year. Governor Quinn is planning to borrow $800 million more in the near future, with higher and higher interest costs paid by Illinois taxpayers. We are reaping the results of years of irresponsible spending and debt.”
*** UPDATE: 4:49 pm *** Republican Leaders Tom Cross and Christine Radogno…
“Today’s downgrade in our bond rating is obviously very bad news for our state and it proves that the General Assembly and the Governor must do some very substantive things this Spring that show we are committed to fundamentally changing the way we structure our budget now and going forward. Enacting major pension reform and Medicaid reforms must be at the top of the list. Obviously the practice of nibbling around the edges on reform and other budget strategies has not convinced these bond rating agencies that we are on the road to recovery. We must be bold and deliberate this Spring.”
*** UPDATE: 5:18 pm *** Topinka attempts to calm bond holder nerves…
TOPINKA TO BOND HOLDERS: ILLINOIS IN NO DANGER OF MISSING PAYMENTS
Comptroller responds to Moody’s announcement
SPRINGFIELD– Illinois Comptroller Judy Baar Topinka on Friday released the following statement in response to Moody’s lowering of the state’s bond rating:
“Despite today’s disappointing announcement by Moody’s, I want to make clear that there is no fear of the state missing a bond payment. In fact, as the state’s Chief Fiscal Officer I can reassure the bond community that the first payment we make each month is to our bond holders.
“Still, this is yet another cautionary note that cannot be ignored. While it would be premature to say how much, if at all, this will increase the state’s borrowing costs, Illinois leaders have a responsibility to hear the message being sent. Moody’s made clear that it would view further borrowing to pay current obligations as a negative act that could cause another downgrade. So once again, I must stress my opposition to proposed borrowing to pay down our bill backlog. The only way out of this mess is to keep cutting spending, provide for a better business climate and, for once, let growth outpace spending.”
[ *** End Of Updates *** ]
* What the Moody’s downgrade effects…
Moody’s Investors Service has lowered the State of Illinois’ general obligation bond rating to A2 from A1 and revised the state’s outlook to stable from negative. The A2 rating has also been assigned to $800 million general obligation January 2012 Series A and Taxable Series B bonds that the state has scheduled to price on January 11. Proceeds will finance school, transportation and other capital projects. We have also downgraded to A2 from A1 the rated portion of the state’s $2.47 billion of outstanding Build Illinois sales tax revenue bonds, and to A3 from A2 $2.48 billion of Metropolitan Pier and Exposition Authority and $73 million of Civic Center Program bonds.
* Bloomberg has initial react…
“Although the state has taken positive steps toward fiscal stability, swift bipartisan action to implement further cost reductions and reforms in the upcoming legislative session are needed to stabilize the budget,” Kelly Kraft, a spokeswoman for Governor Pat Quinn, said in a statement.
Maybe the governor should’ve thought of that idea last year when he proposed $2 billion in additional spending. And that recent three-year projection of his didn’t help. His spending cuts were clearly not enough.
* More from Moody’s…
STRENGTHS
- Sovereign powers over revenue and spending
- Statutory provisions giving priority to debt-service over other state expenditures
CHALLENGES
- Severe pension funding shortfall
- Chronic use of payment deferrals to manage operating fund cash
- Weak management practices reflected in pension under-funding and payment delays
Outlook
The state’s stable outlook reflects its sovereign powers over revenue and spending, as well as statutory provisions establishing priority of payment for G.O. debt service. Although the likelihood of effective, proactive movement on major challenges appears minimal at present, the state’s stable outlook also relies on a demonstrated ability to make politically difficult choices as the need arises.
* Earlier this week, Fitch decided not to downgrade Illinois…
Fitch’s report noted that while the state has narrowed its budget gap, it’s still expected to end the fiscal year in June with a $508-million operating deficit, not counting more than $5 billion in unpaid bills to vendors and service providers. “While the actions taken were positive, significant challenges remain,” Fitch said.
“We are encouraged Fitch affirmed the state’s long-term bond rating,” a state budget office spokeswoman said in a statement. “This action indicates the state has taken positive steps to address its decades-old budget challenges by reducing spending and enacting Medicaid, pension, workers compensation and education reforms. That said, we hear and acknowledge from rating agencies and investors that additional bipartisan action to implement further cost reductions and reforms is needed in this upcoming legislative session to achieve fiscal stability in our state.”
S&P has yet to weigh in.
- wordslinger - Friday, Jan 6, 12 @ 2:34 pm:
Smack! Moody’s is going to love that $900 million corporate income tax rollback.
- DRB - Friday, Jan 6, 12 @ 2:39 pm:
We’ve gotten what we deserve. Decades and decades of Chicago Democrat rule and we’ve made it to the bottom. Oh well, no where from here but up.
- Jade_Rabbit - Friday, Jan 6, 12 @ 2:40 pm:
swift bipartisan action to implement further cost reductions and reforms in the upcoming legislative session are needed to stabilize the budget
________
Aren’t there enough Democrats in office to take care of the budget without bipartisan support? Or is the spokeswoman implying that the Democrats need more Republicans in Springfield to provide a check on the excessive spending?
- wordslinger - Friday, Jan 6, 12 @ 2:43 pm:
–Decades and decades of Chicago Democrat rule and we’ve made it to the bottom.–
Thompson, Edgar, Ryan, Pate, all Chicago Democrats?
- CircularFiringSquad - Friday, Jan 6, 12 @ 2:51 pm:
Gotta love the guys who gave America and the World all those AAA housing bonds, credit default swaps, mortgage back securities and collaterialized debt obligations.
With 10 year treasuries under 2% this does not make much of a difference
- Reality Check - Friday, Jan 6, 12 @ 2:55 pm:
Moody’s blames the downgrade on the state’s failure to address “to its severe pension under-funding” — not the cost of pension benefits.
Of course, Cross/Madigan’s SB512 is SILENT on ensuring the state’s share of pension funding, which is the real problem.
This section of Moody’s report might have been written by the retirement systems, the universities, the school administrators, the public employee unions or anyone else who acknowledges that the real problem is the state finally starting to pay its share:
WHAT COULD MAKE THE RATING GO UP
- Adoption of a credible, comprehensive long-term pension funding plan
That bears repeating. Not cuts to pension benefits. Not forcing higher contributions on public employees. Moody’s understands that what is needed is a credible, comprehensive, long-term pension funding plan.
- DRB - Friday, Jan 6, 12 @ 2:55 pm:
Since 1983, Madigan has run Illinois, I think all but two years as Speaker. Nothing in this state happens unless Madigan wants it to. He is the constant in this colossal downfall of this state of disaster.
- foster brooks - Friday, Jan 6, 12 @ 2:55 pm:
$100 sez theres a connection between moodys and the commercial club (civic comittee)
- OneMan - Friday, Jan 6, 12 @ 2:55 pm:
Well Wordslinger under Rod it did seem like decades and decades
- mokenavince - Friday, Jan 6, 12 @ 2:56 pm:
With the kind of leadership we the people of Illinois elect we are headed to JUNK STATUS.
There’s plenty of blame to pass around,I doubt if
Quinn, Madigan, or Cullerton gets it.The Republicans have also proved they don’t have a clue. Time to toss all incumbents out. We have nothing to lose.
- Rich Miller - Friday, Jan 6, 12 @ 3:00 pm:
Jade_Rabbit, what’s so wrong with a bipartisan plan?
- Jade_Rabbit - Friday, Jan 6, 12 @ 3:21 pm:
@ Rich,
Nothing is wrong with a bipartisan plan.
It just doesn’t fit at this point. Why even mention bipartisanship at this point. Illinois falls below Cali in ratings and sits at 50 of 50. Wouldn’t it make more sense to capitalize on the issue and move forward with a strong Democratic plan to capitilize on a recovery?
It just strikes me as odd that the Majority wants to reach across the isle and share credit for an economic recovery.
What do you think the political adgenda is here with regard to the state’s credit rating? Does this have something to do with Rutherford?
- Downstate - Friday, Jan 6, 12 @ 3:25 pm:
Two businesses, that I have an ownership in, just received notices from the state that we will owe money to Illinois for Unemployment Credit Reduction. This is a new and additional charge for all Illinois employers.
All Illinois employers owe this because Illinois did not repay money that is borrowed from the US Government for Unemployment benefits?
UNBELIEVABLE!!!!
And you wonder why businesses and residents are leaving the state?
- Yellow Dog Democrat - Friday, Jan 6, 12 @ 3:28 pm:
If you go back through the history of Moody’s reports in recent years, they’ve consistently stated that the state has a revenue problem.
Fitch & S&P have been less blatant about advocating for a tax increase…but their analysts are looking at all the same numbers we look at every day, and they recognize the budget can’t be balanced through cuts alone. So, where Moody’s says “revenue”, Fitch says “reform.”
And I think anyone who knows anything about Springfield understands that Democrats are not willing or able to pass new revenue or even make the current one permanent without GOP votes.
It’s just NOT going to happen.
Madigan and Cullerton have already alienated the unions, and they’ll close every state facility in a Republican district — prisons, universities, you name it — rather than tempt fate twice in four years.
“It remains to be seen whether the state has the political willingness to impose durable policies leading to fiscal strength, though in the recent past it has reached consensus on difficult decisions, such as temporary income tax increases enacted last year that stabilized state finances and reduced the state’s need for non-recurring budgetary measures.”
Keep re-reading that my Republican friends until it sinks in.
- Yellow Dog Democrat - Friday, Jan 6, 12 @ 3:35 pm:
@Jade Rabbit:
Democrats cannot pass pension funding reforms that will have them attacked from the left and the right.
I’m not sure what planet you’re living on, but I’d LOVE to know who your wifi provider is.
@Reality Check -
Moody’s has also read the Illinois Constitution, and they sure has heck understand the sanctity of the Contracts Clause.
They have absolutely no interest in advancing an unconstitutional, retroactive pension bill that is simply overturned by the courts.
A negotiated agreement on pensions, however, would work.
- TwoFeetThick - Friday, Jan 6, 12 @ 3:40 pm:
So, let me make sure I’ve got this straight… We labor to make pension payments on an unrealistic funding schedule created almost two decades ago; a funding schedule that basically kept funding flat until a time period that, to legislators then, was well off into the future, but is now upon us. The pension payment ramp-up started taking off in earnest at the exact same time that the economy exploded, which meant that State revenues dried up at the exact same time it was to begin pumping more and more funding into the pension funds in order to meet the arbitrary 2045 deadline of 90% funding (a percentage that is also arbitrary).
Now, because we’re struggling to make payments that will continue to ramp-up under the 1995 schedule, everyone stares in horror at the woefully “underfunded” pension systems, which are “underfunded” in large part because the 1995 payment schedule is not realistic and should be revised, although any attempt at such revision would be slammed as irresponsible (can you see that Tribune headline?). Our credit gets downgraded because of the “Severe pension funding shortfall”, which only exists because we’re trying to abide by an unrealistic law that we created - essentially, a monster of our own creation.
Nope, nothing wrong here.
- Shock & Awww(e) - Friday, Jan 6, 12 @ 4:26 pm:
Many Democrats have villified many Republicans over the years for proposing “heartless” budget cuts (Exhibit A: 2010 Gov. race).
It’s been a mantra for years, one that many have used in getting elected in Illinois, Cook County & Chicago.
Once in office with large majorities, those individuals pushed through a great deal of legislation without any regard for bipartisanship. In some cases, they did so on very controversial issues with no Republican votes whatsoever.
A major problem, however, is not necessarily the fact Democrats had (and have) those large majorities or differing viewpoints. It is the class and manner in which many Democrats have treated their counterparts across the aisle over the years.
I’m sure many of us on here have a few examples in mind, including some favorites involving now-retired members. Folks who have genuine disagreements or concerns on issues involving religion, gender, race, taxes, the 2nd Amendment, etc. being privately disregarded and publicaly attacked with some pretty nasty accusations.
Yet now they’re supposed to be all buddy-buddy?!?
Those wounds don’t heal overnight.
I wouldn’t blame local Republicans for letting Democrats take the heat on many of these consequences and tough choices. A similar strategy lead, in part, to the massive GOP gains on the national level in 2010.
The state, however, will require leadership on both sides. Last year’s budget was the first positive sign I’ve seen in a while, but it’s going to require much more.
If Democrats want Republicans on board, they would be well advised to start making some changes and show they’re genuine. Republicans wanting to make an immediate difference will hopefully take the high road and put those things in the past.
Otherwise, things will quickly blow up if Republicans get the sense Democrats are simply looking for political cover. The partisan divide in Springfield will become even more like D.C. than it is now, and absolutely nothing will be accomplished.
Here’s hoping we’re looking at the dawn of a new day… but I’ll believe it when I see it.
- Neva - Friday, Jan 6, 12 @ 4:26 pm:
Yellow Dog Democrat - Thank you for putting this all in perspective.
I hope Springfield sees the light and decides to raises taxes soon so these problems go away.
Illinois is one of the lowest taxed states in the union, has one of the smallest governments, and is one of the best places to do business with its highly educated work force, diverse culture, and solid infrastructure. Check out “Site Placement” Magazine, they will tell you. Oh, and there is almost an insatiable demand for Illinois debt in the bond markets.
Time to raise taxes and get serious about generating growth, people.
- Louis G. Atsaves - Friday, Jan 6, 12 @ 4:34 pm:
“Bipartisan support.” OK, Quinn said it. Finally.
Madigan?
Cullerton?
- Judgment Day - Friday, Jan 6, 12 @ 4:36 pm:
“Gotta love the guys who gave America and the World all those AAA housing bonds, credit default swaps, mortgage back securities and collaterialized debt obligations.”
Ok, but that still doesn’t mean that Moody’s is wrong this time around. Honestly, all that other “dreck” you mentioned above should have never had “AAA” ratings back then, because it was all crap, and they all knew it.
If anything, they are being extra careful these days, because none of the rating agencies wants to get it wrong this time. The credit rating agencies are all terrified that they are going to get tied up in endless litigation for past sins (deservedly so, IMO), and these days, when in doubt, they are putting the hammer down.
You might notice that all the rating agencies also all “missed” on MF Global, as did MSM. It was the financial blogs like zerohedge that got the story.
It’s not that the State of Illinois is bad - we’re just easy.
- Shock & Awww(e) - Friday, Jan 6, 12 @ 4:47 pm:
Wasn’t the tax hike supposed to help stave off all this?
At least that’s how it has been sold… tax hike will help prevent massive budget cuts, stabilize pensions, pay the bills.
So much for that, huh, PQ & crew?
- Kasich Walker, Jr. - Friday, Jan 6, 12 @ 4:50 pm:
I’m guessing US News & World Report doesn’t list Chicago as one of its top ten “most livable” cities.
Circumvent the raters.
Issue State of Illinois Savings Bond accounts directly to Illinois savers at interests 2 percentage points below what the “market” will “demand” for IL muni bonds. That 3% rate for investors of $100 to $1000 will still be higher than the under 2% presented by most banks for “savings” accounts.
The State will find enough takers.
….and decriminalize, legalize, & commercialize.
- Judgment Day - Friday, Jan 6, 12 @ 4:56 pm:
“I hope Springfield sees the light and decides to raises taxes soon so these problems go away.
Illinois is one of the lowest taxed states in the union, has one of the smallest governments, and is one of the best places to do business with its highly educated work force, diverse culture, and solid infrastructure. Check out “Site Placement” Magazine, they will tell you. Oh, and there is almost an insatiable demand for Illinois debt in the bond markets.
Time to raise taxes and get serious about generating growth, people.”
There is absolutely NO WAY that the Democratic party is even remotely going to go back to the well for more taxes. They party rank and file would tell our “Adventures in Governing” Governor to try and borrow from the IMF (Hint: Not Possible) long before they will ever consider raising people’s taxes.
The only ’solution’ I see (and it’s not a solution, it’s just passing the problems elsewhere) is for the State to totally cut local government revenue sharing, and transfer the problem down to local governments.
- soccermom - Friday, Jan 6, 12 @ 5:03 pm:
@Two Feet Thick is exactly on the money.
And let’s not forget that NO state has defaulted on its debt since, like, 1884. And under Illinois law, bondholders get paid first — before state employees, before school districts, before Medicaid, before any of it. So for the State of Illinois to default on its bond obligations, the sum of all revenues would have to dip below the amount owed to bondholders in that fiscal year - -meaning a drop in revenues of about, what, 93 percent? (In which case, incidentally, our bond rating is the least of our troubles.)
So the rating agencies — which are, let’s not forget, paid by the issuers — get all Chicken Little about our fiscal state, even though the risk to bondholders HAS NOT INCREASED ONE IOTA. Buyers then can get a premium interest rate reflecting a high risk that does not, in fact, exist.
And where were all these fiscal savants when the rating agencies were giving sage advice on the value of derivatives from Goldman Sachs?
What a world, what a world.
- soccermom - Friday, Jan 6, 12 @ 5:26 pm:
oops — i meant they’re paid by the banks. this is what happens when I get het up.
- soccermom - Friday, Jan 6, 12 @ 5:27 pm:
Here’s a bipartisan look at the rating agencies: http://www.huffingtonpost.com/2009/07/15/barney-frank-gop-go-after_n_233989.html