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Ratings agencies react to pension failure

Monday, Jun 4, 2012

* Gov. Pat Quinn, the Tribune editorial board, myself and several others have repeatedly warned that failure to pass both Medicaid and pension reform this spring would lead to a significant bond rating downgrade. Medicaid reform did pass with (mostly) bipartisan support (except for the Senate Republicans, who took themselves out of the game again), but pension reform stalled. So, how did the raters react? Here’s a quick roundup.

* Fitch seemed almost positive

Karen Krop, an analyst at Fitch Ratings, said while she has not seen details as yet, the fact the budget was passed on time with Medicaid reforms “that seemed significant for cost controls” was a positive move for Illinois.

She said that Fitch’s ‘A’ rating with a stable outlook was more reflective of Illinois’ fiscal balance and operations, and any pension reform would be considered positive.

* A Moody’s analyst conceded that the ratings agency understands the political problems involved, but wanted some action relatively soon

But Moody’s Investors Service analyst Ted Hampton said on Friday the credit ratings agency was looking for “significant” action on Illinois’ pensions.

“Any sign the state is at an impasse and is unable to move forward on this issue would be a negative credit factor,” Hampton said, adding that Moody’s recognizes the political and legal challenges involved.

“The state’s pension challenges remain staggering regardless what happens in Springfield in the next few weeks,” he said, adding there was no “silver bullet” that will make the enormous unfunded pension liability immediately disappear.

* And S&P, which warned of a multiple downgrade if action wasn’t taken on both Medicaid and pensions this spring, was cautious

However, an agreement on a budget for next year with reduced deficits and big Medicaid cutbacks was a positive sign for the New York credit rating agencies, assuming the details stand up to scrutiny. The question is whether long-term pension costs also can be curtailed.

“Pension reform is the other piece that’s pretty critical to where the state’s rating moves,” said Robin Prunty, lead Illinois credit rating analyst for New York-based Standard & Poor’s Ratings Services. “A lot will depend on whether there’s action on pension reform.” […]

“If there is no action on pension reform, that is not a positive from a credit standpoint,” said Ms. Prunty.

Discuss.

- Posted by Rich Miller        

18 Comments
  1. - LL Cool J - Monday, Jun 4, 12 @ 9:05 am:

    Stakes is High


  2. - Robert - Monday, Jun 4, 12 @ 9:07 am:

    Good for Illinois to see that none of the ratings agencies are overreacting and are showing some patience.


  3. - Retired Non-Union Guy - Monday, Jun 4, 12 @ 9:22 am:

    Now’s the time to float any bonds the State is thinking about …


  4. - western illinois - Monday, Jun 4, 12 @ 9:38 am:

    The SP downgrade of the US has resulted in a 10 year bond of 1.51%. Of course they have taxing power and a printing press
    Muni Bond pricing is unstructured compared to treasuries but I was looking at some Illinois Bond prices and teh yeilds look just fine. The market does not seem as worried as SP and Moodys.
    Maybe Fitch was more concerned how the state veiws contracts. After all a bond like a pesnion is one


  5. - Shemp - Monday, Jun 4, 12 @ 9:44 am:

    Hanging by our fingernails. If pension reform isn’t enacted sooner than later, it won’t be but a few more years before it’s not if, but just when.

    The great irony is how much harder the choices are going to be down the road because of inaction today over hard choices.


  6. - Rutherford B. Jayes - Monday, Jun 4, 12 @ 9:53 am:

    I think they know the tax increase worked and we should do more of that.


  7. - mark walker - Monday, Jun 4, 12 @ 9:56 am:

    It must be Rutherford on the phone helping us out. Oh, sure.


  8. - wordslinger - Monday, Jun 4, 12 @ 10:01 am:

    I always liked what Sen. Rock had to say about the rating agencies:

    “I don’t have any constituents on Wall Street. My constituents are on Madison Street.”

    The market seems to want state debt, regardless of what rating agencies say. Perhaps underwriters could work a little harder on pricing so issues arent’ going out oversubscribed by a factor of four or five.


  9. - Judgment Day - Monday, Jun 4, 12 @ 10:19 am:

    We’re doing ok so far, just got to finish the deal. So far, so good.

    “The market seems to want state debt, regardless of what rating agencies say. Perhaps underwriters could work a little harder on pricing so issues arent’ going out oversubscribed by a factor of four or five.”

    Word:

    When you offer debt at like, 50+ basis points higher than everybody else, and there’s been a dearth of bonded indebtedness offerings (so less competition), and the only locale that was offering a higher return was Puerto Rico, and when everybody out there is searching for ‘return’, we’ll do ok.

    But all of those situations coming together at the same time tend to be a somewhat unusual set of circumstances. Worked for us this time, but betting on the same things happening down the road - well, IMO that’s risky.


  10. - Robert - Monday, Jun 4, 12 @ 10:35 am:

    ==Perhaps underwriters could work a little harder on pricing so issues arent’ going out oversubscribed by a factor of four or five.==
    Bingo! Try for a better rate; the goal should be a factor of less than two. If the market balks and you end up unsubscribed, you can always reissue at a higher rate. I think the market has been doing a brilliant job at beating Illinois up on its finances in order to get a better price on its debt.


  11. - Dan Johnson - Monday, Jun 4, 12 @ 10:53 am:

    Could someone explain the actual cost to the state in dollars (so I can understand it) from a worse rating? It seems like there’s a lot of rhetoric over the ratings, but I suspect it is overheated. How much more does it actually cost us (especially as interest rates are at a 100-year low).


  12. - RD3 - Monday, Jun 4, 12 @ 11:27 am:

    If I were an investor or ratings agency, I would consider Illinois below “junk” status and the reason is very simple.

    All of the debts and obligations make certain assumptions, but there’s one scenario that hasn’t been included and now should.

    Taxpayers fleeing Illinois.

    I know of several business owners who are either actively or keeping their eyes open for opportunities to move out of Illinois. Most of these are small to mid-size businesses, averaging 10-50 employees.

    They don’t want to get stuck paying for the mess of Illinois. Unless there’s dramatic change in how Illinois does business and affects business, they will leave, taking not only their companies, but jobs, either also taking taxpayers or leaving people here to add to the burdens.

    As this happens, less taxpayers to pay for the same costs, means that each taxpayer will have a bigger share to pay, accelerating the incentive to get out of here.

    So, we must ask ourselves who will be left to pay for everything? It’s not a question of IF people are leaving…they are to some extent, but it will get worse.


  13. - dave - Monday, Jun 4, 12 @ 12:06 pm:

    **If I were an investor or ratings agency, I would consider Illinois below “junk” status and the reason is very simple.**

    LOL - good thing no one is paying you to be an investor.


  14. - Judgment Day - Monday, Jun 4, 12 @ 12:09 pm:

    “Could someone explain the actual cost to the state in dollars (so I can understand it) from a worse rating? It seems like there’s a lot of rhetoric over the ratings, but I suspect it is overheated. How much more does it actually cost us (especially as interest rates are at a 100-year low).”

    Don, that’s not the biggest problem. The State of IL is only 2 full steps from being sub ‘investment grade’ in our credit rating.

    If we take a full 2 step downgrade, we are no longer ‘investment grade’ and that means that the pool of buyers for bonded indebtedness issued by the State of IL is drastically reduced.

    Many entities which buy Tax Exempts can only hold ‘investment grade’ securities (Ex.: See our own State administered ‘Illinois Funds’ as a prime example), or are severely limited by the amount of sub ‘investment grade’ bonds they can hold. We’re talking pension funds, mutual funds, banks, insurance companies - the list goes on and on.

    IF we get the state’s credit rating reduced downward to sub investment grade, the entire situation turns into “The gift that keeps on giving, only in a bad way”.

    We just don’t want to go there.


  15. - 47th Ward - Monday, Jun 4, 12 @ 12:32 pm:

    ===Taxpayers fleeing Illinois.===

    Another U-Haul fan heard from. I think your fears of a mass exodus of taxpaying businesses is overblown.


  16. - Cook County Commoner - Monday, Jun 4, 12 @ 1:19 pm:

    Even if the rating agencies were to lower Illinois’ state bond ratings down below the point where they could no longer be legally purchased by institutions, I suspect Illinois would still sell any bond offerings, at least into the foreseeable future. The increased interest rate, free form both federal and state tax, would be too alluring for many Illinois residents. One could use the bonds as a hedge against increased income, sales and property taxes. There’s plenty of meat left to carve off the complacent taxpayors in Illinois. Actually, I could paint a scenario that a significant bond downgrade would be a good thing for wealthier folks who want to stay in Illinois. The increased taxation to fund the interest may chase poor people out of Illinois, but is that a bad thing? After a while, Illinois will become the state the GA apparently wants: Government pensioners feeding off of a sturdy middle and upper class constituency that can afford them. Think of the savings from health care for the poor, and police, fire, prisons and public schools would experience cost savings because the poor use a disproprtionate amount of their services.


  17. - mokenavince - Monday, Jun 4, 12 @ 1:24 pm:

    It is time for Quinn to call back the legislature
    and keep calling them until something is done to save our State.And do it his way after all he’s stillthe Govnernor.It’s time to man-up and get who ever is his muscle to get these guys in line.

    “Politics ain’t bean bag.” Harold Washington


  18. - truthteller - Tuesday, Jun 5, 12 @ 6:06 am:

    If I were a bondholder, I’d be very nervous. If the state were to decide not to pay pensioners money to which they are entitled, what would stop the politicians from deciding not to pay the bondholders what they are owed?
    Why is it okay to stiff teachers, state cops, and others, but not okay to stiff bondholders?
    Will the state live up to its obligations or not?


Sorry, comments for this post are now closed.


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