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Raters react to pension ruling

Tuesday, Nov 25, 2014 - Posted by Rich Miller

* AP

Moody’s Investor Service said in an announcement released Monday the [Sangamon County judicial ruling on pension reform], if upheld, would speed the growth of debt for one of one of the worst-funded pension systems in the nation.

“The state’s negative outlook indicates the possibility that factors such as further growth in the state’s pension liability will drive the rating lower still,” Moody’s stated.

Standard & Poor’s Rating Services said last week’s ruling would have no short-term effect as savings from pension reform were not included the fiscal year ended July 1, 2015.

“We will continue to monitor the legal process relating to pension legislation,” S&P stated.

* More from The Bond Buyer

Fitch Ratings also said it had not factored in savings from the pension reforms in its rating assessment due to the legal challenge that was always expected to go to the state’s high court and state’s decision not to incorporate savings in fiscal 2015. “The ruling is not an immediate credit concern,” said analyst Karen Krop. “The state’s budget is a more immediate concern.” The state’s fiscal 2015 relies on one-shots and falls to cover a full year’s spending demands as lawmakers failed to approve an extension of the 2011 income tax rates that partially expire Jan. 1

* Bloomberg

“While maybe this ruling was to be expected, the bigger thing is going to be the temporary income-tax hike,” said Adam Buchanan, vice president of sales and trading at Ziegler, a broker-dealer in Chicago. “That, coupled with these pension issues, is really going to put some downward pressure on the rating.”

Rauner’s Chance

For now, rating companies want to see how the state will act. Standard & Poor’s said in a report after the pension ruling that it will maintain its A- rating and negative outlook on Illinois because the grade already incorporated legal hurdles. Karen Krop, an analyst at Fitch Ratings in New York, said this month that Rauner needs a chance to present his plan.

Illinois hasn’t issued general-obligation bonds since April, when it capitalized on a rally following the December passage of the pension measure to lock in borrowing costs close to the lowest since 2009.

Illinois’s yield spread to benchmark munis has shrunk since August as money pours into the $3.7 trillion market. Individuals have added to muni mutual funds for 19 straight weeks, the longest stretch since 2012, Lipper US Fund Flows data show.

More roller coasters ahead, campers.


  1. - The Cardinal - Tuesday, Nov 25, 14 @ 1:45 pm:

    What we ought to be concerned with is how the state will pay bills if the income tax expires? Which appears very likely to happen Jan 1st. That will affect the bond rating in the short term and impact hundreds of other governmental bodies ratings that are owed from the state coffers.

  2. - Sam Weinberg - Tuesday, Nov 25, 14 @ 1:52 pm:

    Nothing to worry about. Now that Rauner is in charge, Ty Fahner will surely call his friends at the rating agencies to make sure there’s no downgrade.

  3. - Yellow Dog Democrat - Tuesday, Nov 25, 14 @ 1:57 pm:

    === it will maintain its A- rating and negative outlook on Illinois because the grade already incorporated legal hurdles ===

    Translation: “Tell Charlie Wheeler we are reasonably literate.”

  4. - Apocalypse Now - Tuesday, Nov 25, 14 @ 2:03 pm:

    How much in extra interest expense has the State incurred due to these reduced ratings?

  5. - Norseman - Tuesday, Nov 25, 14 @ 2:05 pm:

    Well said YDD.

  6. - not so simple - Tuesday, Nov 25, 14 @ 2:08 pm:

    Bond ratings are not science, but art. If the administration starts its governing phase poorly, the bond houses will react accordingly. Maybe the future governor has until the end of February to propose a suitable plan for dealing with the fiscal situation, but if he blows that or isn’t credible, the bond rating agencies will crucify the state. It is one thing to talk about cutting the budget, but there are real costs to not having a plan that the bond rating agencies believe is workable. One of the benefits of the temporary tax hike was that it demonstrated fiscal responsibility and helped keep our bond ratings from cratering further. Kansas has been downgraded severely since it pursued an unbalanced and unworkable fiscal approach. Illinois does not have much room to maneuver in this regard.

  7. - Wordslinger - Tuesday, Nov 25, 14 @ 2:18 pm:

    Bond ratings on state GO debt are not science or art, but a scam.

    It’s a shame the federales still require that issuers have to pay those crooks for their profoundly discredited and fraudulent ratings.

    No one on those ratings committees believes there’s any risk at all to the state’s GO debt. Bond holders get paid first, by law.

    For all the sturm and drang, any time Illinois paper hits the streets it’s snapped up in a New York minute. Buyers know what’s going on.

  8. - Federalist - Tuesday, Nov 25, 14 @ 2:37 pm:

    According to Moody’s and other ratings firms it is always the fault of the pensions. Nothing much else in the budget, just pensions.

    Obviously, after decades of financial chicanery on pensions it is a real problem.

    But it is only one aspect of the budget.

    What is the real AGENDA of these rating agencies? Or are they just that blind and stupid?

  9. - Bill White - Tuesday, Nov 25, 14 @ 2:39 pm:

    Q: What is the real AGENDA of these rating agencies?

    A: Is that a rhetorical question?

  10. - Diogenes in DuPage - Tuesday, Nov 25, 14 @ 2:39 pm:

    Illinois spends like a Blue state, but taxes like a Red state. When will our politicians realize that they cannot cut their way out of this deficit? They must re-evalate their spending and be honest about revenue needs to meet essential services.

  11. - VanillaMan - Tuesday, Nov 25, 14 @ 2:44 pm:

    The fact that they sell isn’t a reason to ignore the problem, claim there isn’t one or claim it is a scam.

  12. - No Longer A Lurker - Tuesday, Nov 25, 14 @ 2:47 pm:

    What happens to our bond rating if Rauner decides not to include pension payments in his budget?

  13. - Yellow Dog Democrat - Tuesday, Nov 25, 14 @ 2:53 pm:

    No Longer:

    That would be bad. And I don’t think a plan that skips pension payments has a ghost of a chance of getting out of either chamber.

    In fact, I am pretty sure it requires a statutory change.

  14. - Wordslinger - Tuesday, Nov 25, 14 @ 3:17 pm:

    Not sure what you’re talking about VMan.

    Regardless of pension liability 30 years out,, there is zero chance of a default on Illinois GO bonds. Ask any buyer, and they’ll tell you. Or you could read up on the subject.

    Bonds get first claim on every dime the state collects and there is ample coverage many times over to service the debt.

    Illinois’ rating is not based on likelihood of payment, but on a comparison of certain fiscal practices with other states.

    It’s a scam because federal law requires the state to pay the agency monopoly for ratings the market does not need and largely ignores.

    And they’re crooks to boot, the wheelmen in the economic crash of 2008.

  15. - chi - Tuesday, Nov 25, 14 @ 3:23 pm:

    Off Topic, but according to the banner ad at the top, Uber supports jobs! What a great thing for them to do. I commend them for their support of jobs. If only all companies supported jobs, there wouldn’t be a ratings downgrade or a pension problem. I salute you, Uber. Keep up the job supporting.

  16. - archimedes - Tuesday, Nov 25, 14 @ 3:24 pm:

    One option - which I don’t recommend - to balance the budget is to do what Quinn did before the income tax increase. Don’t put the pension payment in the budget - then issue Pension Obligation Bonds for the payment. Of course, this adds to debt.

    Many people forget that was the only way we had a balanced budget prior to the tax increase - issue bonds for the pension payment and remove the expense from the general budget.

  17. - zatoichi - Tuesday, Nov 25, 14 @ 3:40 pm:

    Arch, in the budget or out, if the state issues bonds for pension payments, they still have to put money aside to cover that debt. What is the gain by leaving the expense out?

  18. - facts are stubborn things - Tuesday, Nov 25, 14 @ 3:41 pm:

    Proper revenue. You have to pay for what you want, owe, and are required to do. Hopefully you can grow the economic pie as well.

  19. - Yellow Dog Democrat - Tuesday, Nov 25, 14 @ 3:45 pm:

    The raters want Illinois to raise taxes.

    I have always found it hilarious that Republicans have advocated for Moody’s to drive budget policy.

    The lenders want the exact same thing your mortgage company wants: for you to borrow as much money as possible without you missing a payment.

  20. - JS Mill - Tuesday, Nov 25, 14 @ 4:04 pm:

    YDD- tskipping pension payments does not require a statutory change, it should. The state has done it so many times over the last century that we have $100 Billion in unfunded liabilities. Frustrating as it is they have ignored the law so many times it became routine. Quinn, bad as he is, was one of the few to make the payments in full.

  21. - archimedes - Tuesday, Nov 25, 14 @ 4:04 pm:

    zatoichi - the only benefit is in the short term. The year the bond is issued, there is no expense (the next year, debt payments would begin)- and the $7 billion pension payment is removed from the general fund budget. So - you get one year freebie.

    Of course, then you are paying interest and principal for several years (total cost more than the $7 billion).

    But, this is what was done the two years before the tax increase - completely remove the pension payment from the budget and borrow the money to make pension payment. Illinois has done this a handful of times in the past as well (prior to Quinn) - or just ignore the payment and pay nothing.

    The bond houses talk about the pension cost/payment in the context of the budget due to the history of underfunding, simply not paying, or issuing bonds for that year’s payment. They want to see a fiscal structure that predictably pays debt and current expenses (including pensions).

  22. - MikeMacD - Tuesday, Nov 25, 14 @ 4:20 pm:

    If money only costs you 3% that you can use to make 7.5%, then you should borrow as much as possible.

  23. - Anotherretiree - Tuesday, Nov 25, 14 @ 4:27 pm:

    ==Bonds get first claim on every dime the state collects ==
    Under what rule of law ? A pension is an enforceable contractual obligation. Isn’t that the same definition as a bond ?

  24. - RNUG - Tuesday, Nov 25, 14 @ 4:30 pm:

    - JS Mill - Tuesday, Nov 25, 14 @ 4:04 pm:

    Yes, the GA can skip / short the pension fund payments, but as I understand it, since the 1995 ‘ramp” law covers the scheduled payments, they will have to pass a bill in order to ignore / short the funds.

  25. - Arthur Andersen - Tuesday, Nov 25, 14 @ 4:31 pm:

    JS Mill-your statement that “skipping pension payments does not require a statutory change” is incorrect, misleading, or both.
    Every contribution that was made in a given year was the legally required amount-look it up if you don’t believe me. The contributions were well short of what was actuarially sound and necessary to amortize the unfunded-but they were and are legal as can be.

  26. - Apocalypse Now - Tuesday, Nov 25, 14 @ 4:32 pm:

    Workslinger, you have absolutely no idea how the bond market works, especially the secondary bond market, or the rules in place for financial institutions to hold municipal debt.

  27. - RNUG - Tuesday, Nov 25, 14 @ 4:32 pm:

    As far as bonds go, I’m betting on them. Met with my financial advisor Monday and moved some of my retirement savings into a muni bond fund.

  28. - RNUG - Tuesday, Nov 25, 14 @ 4:40 pm:

    - Anotherretiree - Tuesday, Nov 25, 14 @ 4:27 pm:

    Short over simplified answer is that either a permanent continuing resolution or a dedicated revenue stream funds specific bond repayments. That means they get paid “first” every year.

    However, given the mounting evidence that the pensions can’t be avoided, I would say the pensions are, probably, at least co-equal with the bonds these days. We would still need a court case to actually sort out who’s on first. This is actually a bit ironic because the goal of the bonding houses pushing pension reform is to make sure they get paid / are ahead of the pension payments and the recent SB-1 fiasco may ultimately cause the opposite result.

  29. - Wordslinger - Tuesday, Nov 25, 14 @ 4:41 pm:

    AN, I’m sure those institutions breathed a big sigh of relief that the sub-prime MBS they were holding when the music stopped had AAA ratings, per their “rules.”

    How you noticed some lack of market for Illinois GO paper?

    How would you rate the risk of default, and what would you base that on? Certainly not on coverage or experience.

  30. - Andy S. - Tuesday, Nov 25, 14 @ 4:42 pm:

    Arthur and others, the legislature can change the required amount of pension funding any time it wants. Recently, this happened in 2006 and 2007 when the law was changed allowing those years’ contributions to be way below what the 1995 ramp law required. This is why I can only hope that the ISC, if it rules on SB1, revisits the issue of what constitutes impairment, and requires the state in the future to contribute every year whatever amount the pension systems certify, just like New York courts did in 1993.

  31. - Andy S. - Tuesday, Nov 25, 14 @ 4:50 pm:

    By the way, the 2005 legislation declaring the pension holiday for 2006-07 did not change the 5 pension systems’ certification process for what the state needed to contribute. It basically said: notwithstanding what the pension systems certify, we will only contribute up to $X in those years. If this is allowed to keep happening in the future, I am afraid that any victory achieved by state employees before the ISC will be a hollow one.

  32. - RNUG - Tuesday, Nov 25, 14 @ 5:00 pm:

    - Andy S. - Tuesday, Nov 25, 14 @ 4:50 pm:

    The previous IFT (1975) case made it clear the pensions have to be paid when due. Nothing since has changed that decision.

    In most people’s opinion, that means the State has to pay the pension checks every month whether the funding source is the 5 pension funds or the General Revenue Fund.

  33. - Formerly Known As... - Tuesday, Nov 25, 14 @ 5:03 pm:

    Not even the pension houses considered these ==savings== real, because they are not.

    The ILGA and friends have ignored countless warnings that paying these pensions is mandatory.

  34. - Formerly Known As... - Tuesday, Nov 25, 14 @ 5:04 pm:

    ==pension houses== rating houses

  35. - VanillaMan - Tuesday, Nov 25, 14 @ 5:15 pm:

    Mr. wordslinger,
    Thanks, but I knew that.

    Yet, this is a big deal regardless of your dismissal of it.

  36. - Wordslinger - Tuesday, Nov 25, 14 @ 5:17 pm:

    What’s a big deal?

  37. - Arthur Andersen - Tuesday, Nov 25, 14 @ 5:18 pm:

    RNUG, let us not forget that the 1995 funding program contained a permanent continuing resolution.

    Very few things are truly permanent in Illinois.

  38. - Yellow Dog Democrat - Tuesday, Nov 25, 14 @ 5:59 pm:

    I suspect it will be 2019 at the earliest before Illinois skips or shorts a pension payment.

    The rhythms of state government are like cicadas.

  39. - RNUG - Tuesday, Nov 25, 14 @ 9:20 pm:

    -AA- good point that I had forgotten about …

  40. - walker - Tuesday, Nov 25, 14 @ 11:01 pm:

    Wordslinger knows exactly how this all works. He’s not saying the ratings don’t have impact, but rather they shouldn’t. The system that assigns substantial relative risk to nearly risk-free instruments is obviously absurd.

    Word has his eye on the Emperor’s clothes.

  41. - Yellow Dog Democrat - Wednesday, Nov 26, 14 @ 9:21 am:


    I would say “supremely ironic.”

    As far as I can see, pension benefits are now on equal footing with bond holders.

    If both parties are equally entitled, then I think courts have to decide who you pay first based on the least harm standard.

    Surely the 73 y.o. retiree has the stronger claim that postponing her pension payment would cause irreparable harm, while the bond holders can wait.

  42. - Six Degrees of Separation - Wednesday, Nov 26, 14 @ 9:50 am:

    During the 4+ years of considering an unconstitutional solution to the debt, how much bigger did the debt grow? The whole effort to craft a “solution” was like watching a failed Hail Mary pass in extreme slo-mo, frame by frame.

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