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*** UPDATED x1 *** S&P warns Illinois as Quinn demands fast action, rejects Cullerton plan

Wednesday, Jun 6, 2012 - Posted by Rich Miller

* Standard & Poor’s claimed today that Illinois pension reform faces an uphill climb and kept its negative outlook in place

There was no action during the regular legislative session on pension reform and we consider this negative from a credit standpoint. Given that the pension reform legislation did not pass during this session, it will now be a much more significant challenge to implement, in Standard & Poor’s opinion, requiring a three-fifths majority if addressed in a special session in 2012.

We have kept our outlook on the state of Illinois (’A+’ general obligation debt) negative since January of 2011. Despite significant revenue enhancement and ongoing revenue recovery, structural budget balance has been elusive and liquidity remains strained due to the state’s growing accumulated deficit (accounts payable and general fund liabilities). We expect to resolve the outlook on Illinois this year based on our review of the fiscal 2013 enacted budget and the state’s progress, if any, on addressing its significant pension
liabilities and associated cost pressures.

* Gov. Pat Quinn’s office offered up a reaction

“It is clear from this (S&P writeup) as well as past ratings agencies’ comments that pension reform must happen immediately,” Mr. Quinn’s office said in a statement. “(The governor) cannot act alone and continues to work with legislators to make certain we address this challenge.”

* Quinn met with the other leaders today and is now back to insisting that some pension cost-shifting to local school districts be enacted. Quinn dropped the idea last week when the Republicans wouldn’t agree to it, but then the resulting pension reform bill died because Speaker Madigan was opposed.

Quinn also dismissed Senate President John Cullerton’s proposal to just do the state and General Assembly retirement systems right now and put everything else off for a while. “I think it’s very important to understand that this issue can’t be delayed, it can’t be a partial solution,” Quinn said.

Quinn said today that the leaders will meet again sometime around the “19th, 20th or 21st of this month” to look at data for the various ideas which were offered up at the meeting. He didn’t specify what those ideas were.

* Raw Quinn audio…

*** UPDATE *** Via the AP, it appears the leaders are divided into two camps

Senate President John Cullerton, Senate Minority Leader Christine Radogno and House Minority Leader Tom Cross want to pass measures where there’s already broad agreement and keep negotiating the others.

But Gov. Pat Quinn says he wants a complete overhaul, and House Speaker Mike Madigan says any pension reform should address the schools issue.

       

32 Comments
  1. - wordslinger - Wednesday, Jun 6, 12 @ 1:56 pm:

    Any chance there will ever be an explanation from credit agencies as to how a state that has never missed a GO bond payment and is legally obligated to pay debt service first is not AAA rated?


  2. - titan - Wednesday, Jun 6, 12 @ 1:56 pm:

    This, of course requires a greater majority to do what they couldn’t get done a week ago…

    Wonder how that’ll work for them?


  3. - Rich Miller - Wednesday, Jun 6, 12 @ 1:58 pm:

    ===This, of course requires a greater majority===

    Only with an immediate effective date.


  4. - Anonymous - Wednesday, Jun 6, 12 @ 1:59 pm:

    “Any chance there will ever be an explanation from credit agencies as to how a state that has never missed a GO bond payment and is legally obligated to pay debt service first is not AAA rated?”
    Word-
    While I agree with you that the rating agencies’ methodologies are highly questionable, the fact is that their opinions matter. So, sure, work to challenge those invalid assumptions about risk but concurrently play the game since they set the rules.

    And in that vein, I like Quinn 2.0 lots more than version 1…


  5. - Nibbles T. Feline - Wednesday, Jun 6, 12 @ 2:01 pm:

    Skokie and Lombard are over 90% solvent in public sector pensions because they take pension contributions and actually put the money in the pension kitty. Maybe the big people in charge can ask some of the little people in Lombard and Skokie how to achieve a solid pension system. By the way, what is “sock puppetry”?


  6. - Foxfire - Wednesday, Jun 6, 12 @ 2:05 pm:

    This whole issue about pension costs being driven by wages and benefits negotiated at the local level is a red herring. The State of Illinois - and only the State of Illinois - determines pension benefits and levels. Locals have no say in that process and Quinn and others sound uninformed or disingenuous when they make statements about locals taking responsibility for “their decisions.”


  7. - Cassiopeia - Wednesday, Jun 6, 12 @ 2:16 pm:

    Quinn needs help with his negotiating skills.

    By rejecting Cullerton’s adult approach he gets off to a bad start.


  8. - Sue - Wednesday, Jun 6, 12 @ 2:19 pm:

    FoxFire is 100 percent correct- Local School Districts don’t determine pension benefits- it is totally driven by the State Pension Code brought to us by the legislature controlled by the IEA- At best the local school districts are responsible for the game playing at the end of career retirements but again they are only doing what the pension code allows- all the noise about shifting costs onto the local school districst is more hide the ball BS and results from the State having failed to pay into the pension systems what was required for the past 40 years- rather then shift the cost now how about some meaningful reform which really drives down the cost no matter who pays- If our neighbor to the North could do it why not Illinois/ If Illinois truly wants reform- reduce the COLA and limit what the Districts are lawfully permitted to pay to administrators- if we can’t reduce pension benefits as everyone claims- attack it by what we are paying in the first place which will backdoor pension cost reductions- Paying superintendants and their administrative teams hundreds of thousands of dollare costs a fortune when these folks retire- lets limit admin salaries by statute


  9. - 47th Ward - Wednesday, Jun 6, 12 @ 2:29 pm:

    I’m not sure Quinn is in a position where he can dismiss a partial solution. If Cullerton has the votes and if there is a reasonable chance that the House will go along with it, why wouldn’t he start with a partial solution of reforming SERS and the GA pension systems?

    Progress is progress so rejecting an idea that might move the ball forward is a bad idea. The perfect is often the enemy of the good. Take what you can get and keep at it until it’s done, either in Veto or Lame Duck.

    More importantly, since any pension reforms will likely be challenged, pass something (anything) to get the ball rolling in the court system now. The alternative is waiting to find the votes needed for a comprehensive solution that still gets overturned by the Supreme Court. What does that accomplish other than wasting time and political capital?


  10. - Bill - Wednesday, Jun 6, 12 @ 2:30 pm:

    ==legislature controlled by the IEA==

    If only…


  11. - Judgment Day - Wednesday, Jun 6, 12 @ 2:36 pm:

    “Any chance there will ever be an explanation from credit agencies as to how a state that has never missed a GO bond payment and is legally obligated to pay debt service first is not AAA rated?”

    Word:

    The credit rating agencies got caught in a trap over the bonding of mortgage indebtedness (the entire MBS nightmare that started the recession). Now, they were willing players and basically (IMO) got ‘bought off’ by the big Wall Street financing firms that issued the crap paper. But they basically excused the whole thing based upon the ‘interpretation’ that (a) nobody had missed a payment, and (b) the housing market had always been increasing in value all these many years, so these bonds were all AAA, yada, yada, yada.

    Well, as we know well now, they were, until they weren’t. And when they weren’t, well, bad times for everybody who invested in the crap paper.

    The credit rating agencies are not going to go through that whole cycle again. Ain’t happening - not if they want to keep their heads. And there are lots & lots & of people out there who would like a reason to take their heads off.

    Now, have they probably over tightened their credit rating standards - yeah, probably. But, from their viewpoint, they’ve seen this whole act before (just in a different venue).


  12. - titan - Wednesday, Jun 6, 12 @ 2:38 pm:

    @Feline - the IMRF system is in good shape, because the municipalities and counties aren’t allowed to skip/short their payments in (like the GA chronically does).


  13. - dave - Wednesday, Jun 6, 12 @ 2:46 pm:

    FoxFire is 100 percent correct- Local School Districts don’t determine pension benefits-

    Huh? Last I checked, pension benefits were based off of salaries. And last I checked, salaries were determined by local school districts.


  14. - Judgment Day - Wednesday, Jun 6, 12 @ 2:47 pm:

    (cont.):

    These days, it’s all about where the credit rating agencies think you are going to be, not where you have been. May not be fair, but I can at least understand why they are taking that approach.

    It’s just like redistricting: Build your map for where you think population will be going in the future, not where it is today.

    When I see a release like that one from S&P, that reads to me like “Last Call”.

    As much as I hate to admit it, PQ probably has read this one correctly.

    I wouldn’t be surprised if this turns into a two-fold set of legislative changes:
    1) The transfer of TRS pension obligations to local school districts.
    2) Some down-and-dirty reforms to the local school district pension benefits as derived under the State Pension Code.

    If part 1 happens, and part 2 doesn’t happen, you’ll just see widespread downgrades of existing credit ratings of local school districts, and their bond issues.


  15. - Secret Square - Wednesday, Jun 6, 12 @ 3:02 pm:

    “By the way, what is “sock puppetry”?”

    According to Wikipedia, it is the practice of assuming a fake online identity for the purpose of discussing yourself or your actions in the third person. For example, if I took a different blog name and started posting comments praising Secret Square for his/her political genius, that would be sock puppetry.


  16. - GA Watcher - Wednesday, Jun 6, 12 @ 3:05 pm:

    Dave: Sue and FoxFire are correct in that pension benefits are negotiated and set at the State level. These would include employer/employee share, COLA adjustments, spousal benefits, etc. You are correct in that salaries are negotiated and set by the local school districts. Salary levels are certainly the single most significant factor that affects the pension obligations paid to local school teachers and staff.


  17. - Robert - Wednesday, Jun 6, 12 @ 3:16 pm:

    (from AP) “The biggest dispute is over whether to make downstate and suburban Chicago schools take over the cost of employee pensions.”

    I believe the legislature is roughly 70% downstate+suburban Chicago vs. 30% city of Chicago. While I’m in favor of the idea, I don’t see how the legislative leaders can gather enough votes to pass pension costs off to the local school districts.


  18. - thechampaignlife - Wednesday, Jun 6, 12 @ 3:22 pm:

    Apologies for this repost of my Monday comment:

    Why not make the school districts pick up the costs incurred due to raises and new hires? Schools would then have some control over those costs and could plan for them in union negotiations and when making job offers.

    It would also be helpful if schools had a choice in the retirement plans it offers its employees. The state could establish several retirement plans with varying degrees of defined benefit, defined contribution (with and without at match), and social security. That allows some school districts to pay higher salaries for lower retirement costs/risks while others could pay lower salaries in exchange for a more attractive pension.


  19. - Ready To Get Out - Wednesday, Jun 6, 12 @ 3:26 pm:

    Quinn said today that the leaders will meet again sometime around the “19th, 20th or 21st of this month”

    Coincidence?? AFSCME leaders will be in California for the national convention.


  20. - anon - Wednesday, Jun 6, 12 @ 3:42 pm:

    ITS A FUNDING PROBLEM PEOPLE!
    They can modify future benefits as much as they want - those changes will face legal challenges and based on what they have proposed so far they will likely be held unconstitutional - PLUS - they don’t do anything about the funding of liabilities.
    THE BOND RATERS ARE NOT STUPID!
    They know as anyone with any sense knows that any “reform” that does not include dedicated funding by the state is NO REFORM - If the FUNDING issue is not addressed its all just a temporary band aid - S&P and Moody’s know this. HB1447 and other measures that do not unequivocally guarantee EMPLOYER contribution funding merely delay additional “reform” measures for 3-4 years.


  21. - Deep South - Wednesday, Jun 6, 12 @ 3:46 pm:

    How many pension plans are there? I know there’s SERS, SURS, TRS…there’s probably about five more. Each has it’s own set of rules and requirements. Not all are union-affiliated/based, Such as SURS. To think these guys are gonna find a one size fits all solution in just a few negotiating sessions boggles the mind. I mean, SURS employees already contribute some sort of cost-of-living increase provision. How can there be a generic fix?


  22. - Jerry101 - Wednesday, Jun 6, 12 @ 4:03 pm:

    It’s not a funding problem - well, some of it is - but the bigger problem is the same one affecting every pension plan nationwide: the risk-free rate of return (or discount rate).

    Sustained zero-interest rate policy (zip) by the fed has caused discount rates to fall to historic lows. The long-term liability is heavily influenced by thediscount rate. The lower the rate, the greater the long-term liability.

    This is the nature of the estimate that drives long term pension liabilities. Should the Fed allow interest rates to rise back into line with historic norms, a massive chunk of the unfunded long-term liability would disappear practically overnight (as the discount rate rises back to historic norms).
    Too much pension ‘reform’ and we’re going to find ourselves sitting on an overfunded penion (sooner or later).

    It’s an estimate. The system will be fine over the long run as long as contributions > actual benefit payments in any given year. Its just stupid that we have to destroy our state over an estimate that may wildly vary from reality in the long run.


  23. - Siu prof - Wednesday, Jun 6, 12 @ 4:35 pm:

    Jerry is right. It is all a big estimate. Another factor in the estimate is the 90 percent funding target. So what they are trying to do is have enough funding to cover the unlikely event of 90 percent of all employees showing up one morning and demanding lump sum payouts. The target could just as easily have been 70 percent.


  24. - Ain't No Justice - Wednesday, Jun 6, 12 @ 5:17 pm:

    If this does happen, since education and local budgets are as dim as the state of IL, won’t our property taxes go through the ROOF?


  25. - Arthur Andersen - Wednesday, Jun 6, 12 @ 5:35 pm:

    With all due respect, Jerry and SIU prof. are vastly oversimplifying some complex calculations, particularly as they apply to the Illinois pension systems.

    While Jerry is technically correct that the “discount rate,” or more commonly called the long-term inflation rate, is likely overstated in current actuarial projections, he’s equally correct that to reduce it would have the uninteneded consequence of raising the unfunded liability. S&P et al would love that.

    However, the discount rate/inflation rate is only one part of the overall 8.5% invesstment return assumption, the other being a net-of inflation, “real rate of return,” of 5.0%. Over the long run, 30 years+, TRS at least has exceeded this composite goal.

    As far as 90% funding, any competent actuary will tell you the only acceptable plan design is 100%. Who would buy an insurance policy that only paid you 70% of the face value when you croaked if you made a couple payments late?

    Ok, I oversimplified too. Been a long day.


  26. - western illinois - Wednesday, Jun 6, 12 @ 5:50 pm:

    The state is not an insurance company it is an “immortal” taxing enitity with some soverign power
    NBC led with the California pension votes which have been discussed with earlier pension threads It also had …..Bost. Voters passed some restrictions by large margins but I would note that San Diego is a GOP city and it was a GOP turnout Obama only won 51-47 in their new open primary
    San Diegos looked like it applied to new hires so it looks constitutional. San Jose requires huge 16% of salary payments. The San Jose cops have been in court already
    The peice also had the Rouse from Northwestern who keeps showing up attacking public employees which Huffington Posts Fineman says is the new Rove wedege strategy to divide union Public employees will be the dem One Percenters. he said the White House plan will be to change the language from Public Employees to Teachers Cops and Firemen(as opposed to Banksters I assume)


  27. - Fed up - Wednesday, Jun 6, 12 @ 7:02 pm:

    So Madigan gave up sponsorship and ended up defeating his own bill because he said Quinn opposed the cost shift. Now Quinn wants the cost shift. It’s amazing Illinois isn’t in worse shape.


  28. - park - Wednesday, Jun 6, 12 @ 8:57 pm:

    nice having a successful business man like Pat Quinn as our CEO at times like this.


  29. - reformedformerlibertarian - Wednesday, Jun 6, 12 @ 9:01 pm:

    Do the downstate school districts have their own separate funds for teacher pensions or are all pensions thrown in one pot? Would proposals to make the locals pay more change that?


  30. - Michelle Flaherty - Wednesday, Jun 6, 12 @ 9:18 pm:

    Firefox et al:
    The state sets the pension formula but the locals plug in the numbers. The state doesn’t control local payroll or local teacher contracts. Those are the numbers that drive the pensions. If a district wants to pay a superintendent $1.8 million (so far none do), that’s a local decision. But then that salary goes into the state pension formula.
    That’s why real pension reform needs to start with local school boards owning up to the costs that they dump onto the state taxpayers. For years they routinely hiked employees salaries 20 percent in the final four years in order to max out the pension benefits before they turned them over to the state. Now that’s down to 6 percent but that’s still excessive.
    Again, your pension is determined by how much you make and how many years you work. Those numbers are both controlled by the local school district, not the state.


  31. - Michelle Flaherty - Wednesday, Jun 6, 12 @ 9:20 pm:

    Reformed,
    All non Chicago public schools are part of TRS. They have one big investment fund. So, no, there are not 800-some individual pension funds that collect, invest and payout purely for those districts.
    Now that’d be a hardcore pension reform.


  32. - jerry 101 - Thursday, Jun 7, 12 @ 11:57 am:

    Arthur Andersen -
    You are incorrect on several points.
    The discount rate is not the long term inflation rate, though it is an attempt to estimate the long term inflation rate. It is the risk-free rate of return. It is intimately tied to the yield of Treasury securities. The rate for Treasuries is intimately tied to the Federal Funds Rate, which, for short term securities is, currently, effectively zero and is being held there for at least another year. We’ve had an extended period of ZIRP, lasting several years already. This has caused the discount rate to fall to historic lows. That fall has severely increased the funding requirements for ALL defined benefit pension plans. I have seen plenty of plans that drop in more than their ARC, and still see their plan’s AAL continue to shoot up, mostly because of the discount rate.

    The discount rate does not feed into assumed investment return rate. That is a separtely determined calculation. It may be a consideration when determining that rate, but there are plenty of pensions that have held their investment return rate steady since 2008, but have still seen their liabilities skyrocket. Decreasing that rate, typically seen as advisable these days, does not have anywhere near the impact of decreasing the discount rate.

    A funded rate of 100% is very desirable for a plan backed by a private company. There have been many instances of private companies underfunding their pensions, then declaring bankruptcy to get out from under their commitment and foisting it onto the PBGC.

    The State of Illinois cannot declare bankruptcy. So why is it necessary to strive to achieve a 90% funding level by 2025 (I believe)? As Rich has pointed out, TRS was funded at 50% (or less) back in the 1950’s. Yet, as far as I know, it’s never failed to meet its obligations.

    It’s an estimate, with a ton of inputs, and dependent on a lot of assumptions that cover a very long time. Do you really think that we know what the financial landscape of illinois is going to look like in 2025? or in 2042? Do you think that actuarial projections of the funding needed to pay out pensions in 2012 were anywhere near accurate back in 1982?

    It’s an estimate. A useful tool to see what kind of money we should be socking away now to blunt the impact of the liability in 20, 30, 40 years. The pension liability isn’t a real, fixed obligation like a GO Bond. With a GO bond, you know exactly what the principal is. Typically, you know exactly what the interest due will be (except for those bonds that have a floating rate). We won’t know how right or wrong the actuaries are for decades. But we’re letting a vague estimate decide policy now by forcing ourselves to overcontribute based on a guess.


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