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Moody’s: Illinois ratings will be based on whether state can deal with revenue problems and show it can make required pension payments

Monday, Aug 31, 2015

[Comments now opened.]

* Summary…

Moody’s has issued a short report concerning the ongoing budget stalemate in Illinois (rated A3/negative outlook). Illinois has had budget delays before and the weak governance is already factored into the state’s rating. However, the nature of the eventual agreement will matter far more to the state’s fiscal situation than the long delay that has already occurred. The report’s highlights are:

    * Pension funding pressures are growing, and the state cannot reduce liabilities through benefit cuts. Costs of constitutionally protected pension benefits are rising and funding pressure will be compounded by retiree healthcare benefit costs, which are rising by about 6.5% a year.

    * Illinois still has options to address its current-year deficit. An approximately $5 billion projected deficit can be offset with a combination of spending cuts and revenue increases including reinstating higher income tax rates.

    * The current impasse underscores the state’s governance weaknesses. Illinois has had late budgets before. This time, the Republican governor’s struggles to reach agreement with the legislature’s strong Democrat majorities have not yet strained the state’s finances, but that will change if an accord is not reached soon.

The press release is below and the report is attached. If you have any questions or wish to speak to anyone at Moody’s, please contact me. Thanks

David Jacobson

AVP, Communications Strategist - Public Finance Group

Moody’s Investors Service

* Press release…

Moody’s: Illinois’ budget impasse secondary to intensifying pension and revenue problems

The State of Illinois’ (A3 negative) current budget stalemate underscores the weak governance already incorporated into its rating, and is symptomatic of the state’s severe fiscal challenges, Moody’s Investors Service says in “State of Illinois: Late Budget Matters Less than Solving Pension and Revenue Problems.”

“Illinois projects its income and other taxes to generate $32 billion this fiscal year, or $5.4 billion less than expenditures without cuts,” author of the report and Moody’s Vice President – Sr Credit Officer Ted Hampton says. “While the state still has options to address its current-year deficit, continued political gridlock and the inability to reach an agreement by late September will greatly increase the likelihood of the deficit moving from projected to actual.”

The state also faces intensifying pressure to fund retiree benefits, which account for roughly 24% of its current general fund expenditures. The pension funding situation is compounded by retiree healthcare benefits costs, which are growing at about 6.5% a year.

“The state’s ability to manage these pressures will be a primary determinant of future rating actions. Given the state’s ironclad protection of benefits for current workers and retirees, Illinois requires a long-term plan to ensure it can at least comply with statutory funding requirements,” Hampton says.

Moody’s says the state has been deficient for many years in meeting the standardized annual required contribution (ARC) requirements to its pensions, and has been legally blocked from reducing its accrued liabilities via pension benefit cuts.

In the absence of a budget, Illinois will eventually have insufficient revenues to fund likely expenses, even as the pace of spending has slowed from last year. Some expenses have been paid because they do not require appropriation, have been mandated by court orders, or are allowed under limited appropriation measures.

Like other states, Illinois has had budget delays before, most recently in FY 2010. Moody’s believes it is unlikely Illinois can significantly reduce expenses without having a full budget in place, especially with services like healthcare that continue to be provided.

* The full analysis (click here) includes a possible road map

Illinois has the economic capacity to absorb higher income tax rates. It is one of only eight states that levy a flat individual income tax. Among those states, Illinois’ current rate is comparatively low: the average among these states is 4.4%, compared with 3.75% in Illinois. Unlike excise taxes, income taxes can be implemented retroactively, although the political feasibility of applying higher income taxes retroactive to July 1 has diminished, given that a quarter of the state’s fiscal year likely will have elapsed before new policies can be implemented.

Raising the individual rate to 4.75% from 3.75% and the corporate rate to 6.75% from 5.25% for the second half of this fiscal year would generate approximately $2.4 billion of additional revenue, leaving about $2.2 billion of the deficit to be addressed by other measures. The state could probably impose $1.7 billion of expenditure cuts, less than half the $3.7 billion of savings in the governor’s proposed budget that were not related to employee benefit reductions. This would leave $500 million to be addressed by additional new revenue, or non-recurring measures.

As time has elapsed, the difficulty of realizing such savings has increased; imposing these spending cuts in a shortened period may prove politically challenging. The cuts would reduce monthly outflows by about 9%, twice the monthly reduction that would have been required if such cuts had been put in place for the full year.

- Posted by Rich Miller        

21 Comments
  1. - Wordslinger - Tuesday, Sep 1, 15 @ 9:24 am:

    It’s a governance problem, not an economics problem. But it’s getting worse every day with real-world consequences.

    Perhaps it’s time for the governor to re-prioritize and put his self-made fiscal crisis first, without pre-conditions.

    It’s his job.


  2. - Anonymous - Tuesday, Sep 1, 15 @ 9:27 am:

    Um, duh. This says what most have been saying for a while now. Will this get the Governor’s attention? I doubt it.


  3. - Anonymous - Tuesday, Sep 1, 15 @ 9:27 am:

    How many downgrades to go before Rauner matches the Quinn-Madigan era?


  4. - burbanite - Tuesday, Sep 1, 15 @ 9:27 am:

    Maybe they should hold a fundraiser, they seem to have no problem raising money for campaigning.


  5. - Anonymous - Tuesday, Sep 1, 15 @ 9:30 am:

    Rich, how about you show a shred if intellectual integrity for once and just write an opinion piece saying you support tax increases with only minor reforms?


  6. - burbanite - Tuesday, Sep 1, 15 @ 9:33 am:

    This isn’t an opinion piece from Rich, it is Moody’s opinion.


  7. - Juvenal - Tuesday, Sep 1, 15 @ 9:33 am:

    After all of the @StateHouseChick editorials citing Moody’s and demanding pension reform, I can’t wait to read the Tribune editorial demanding a hike in the personal and corporate income tax.


  8. - X-prof - Tuesday, Sep 1, 15 @ 9:38 am:

    Apparently, Moody’s has zero interest in the Turnaround Agenda. They don’t even mention it. Remarkable.

    They don’t seem to understand that a state with above average wealth can still be too poor to fulfill its financial obligations. They would have us believe that several solutions are readily available. Incredible.


  9. - Oswego Willy - Tuesday, Sep 1, 15 @ 9:38 am:

    At some point, the actual governing must be done.

    Rauner gambled that Madigan would wear the jacket of the state collapsed under the weight of not functioning.

    The gamble has failed.

    Now Rauner will have to clean up his own made mess, with a GA he, himself, has made hostile to him by campaigning for 8 months instead of attempting to govern.

    All 67 GOP GA will be “green” for this revenue increase. It would be complete malpractice if the 67 aren’t required.

    Bruce Rauner’s failure could very well sink the ILGOP for a very long time.


  10. - Slippin' Jimmy - Tuesday, Sep 1, 15 @ 9:42 am:

    And the Governor sez?


  11. - Rich Miller - Tuesday, Sep 1, 15 @ 9:56 am:

    ===write an opinion piece saying you support tax increases with only minor reforms? ===

    Because that isn’t my position.

    I’ve made my views quite clear. Moody’s gets its chance on this post. If your little mind can’t deal with that, then move along.


  12. - Norseman - Tuesday, Sep 1, 15 @ 10:18 am:

    With Gov Rauner, we don’t need Ty working to downgrade the state’s credit rating.


  13. - Arizona Bob - Tuesday, Sep 1, 15 @ 10:24 am:

    Not a mention of the second highest in the nation property tax costs for Illinoisans when stating:

    “Illinois has the economic capacity to absorb higher income tax rates.”

    Apparently the “geniuses” at Moody’s don’t think aggregate tax burdens are relevant when it comes to increasing state revenues.

    Not a mention that an incredible amount of the pensions problems come from education pension obligations, and no suggestions regarding cost shifts to those who created much of the problems, the schools an universities who escalated staffing and pensionable salaries far beyond the states ability to pay under current revenue mechanism. Of course there are no suggestions regarding ways to mitigate escalating salary costs such as the common sense action of prohibiting public employee strikes, as is the case in all but none other states, all of which are in far better shape financially than Illinois.

    No mention of lost revenues due to jobs and high income people leaving Illinois

    So Moody’s suggests hurting taxpayers and the economic market of Illinois without regard to the pain and damage it would cause for the state’s economy and hardship it would cause on it’s people.

    Rating services couldn’t care less about the borrower’s well being. they just want those investing in their bonds to be paid, and paid well…


  14. - IL17Progressive - Tuesday, Sep 1, 15 @ 11:30 am:

    Moody’s identifies the three primary problems (1) unpaid or late payment of bills (2) current budget unbalanced, (3) unfunded pension responsibility.

    Note they ignore Gov. Bruce’s agenda since nothing in the GOP agenda will change any of the three issues! Moody’s does say tax increases will address the issues!

    Says to me Gov. Bruce is really ignorant of business processes and economics.


  15. - nixit71 - Tuesday, Sep 1, 15 @ 12:48 pm:

    @AB - Agreed. Moody’s assessment of the average taxpayer’s ability to “absorb higher income tax rates” is about as laughable as their history of rating mortgage-related securities.

    Not only zero mention of the overall tax burden, but missing the boat entirely on the fact that IL does not tax retirement income. Absorption is in the eye of the beholder of the sponge, I guess.


  16. - Apocalypse Now - Tuesday, Sep 1, 15 @ 1:12 pm:

    Doesn’t Illinois rank among the highest in property tax rates, sales taxes and gasoline taxes. Maybe, the citizens of Illinois need a little less spending and not more taxes. By the way, why doesn’t Illinois tax some portion of retirement income? Some of folks retiring with those outlandish fat pension could help out. That doesn’t need a constitutional amendment.


  17. - Civic Sam - Tuesday, Sep 1, 15 @ 1:15 pm:

    If all else fails, the governor can save the day and also turn Illinois around in Seven Steps:

    https://medium.com/@stevesewall/the-seven-step-solution-to-end-the-war-for-illinois-and-turn-illinois-around-31e33c38454b

    This solution, among other things, goes to the roots of Illinois’ “weak government” problem, as Moody’s calls it.


  18. - nona - Tuesday, Sep 1, 15 @ 2:14 pm:

    During the Quinn administration, Moody’s critiques were gospel for the GOP. Now Moody’s supposedly doesn’t know what its talking about. So what changed?


  19. - thechampaignlife - Tuesday, Sep 1, 15 @ 2:45 pm:

    Any chance that a bond payment is missed due to all these court orders binding the order bills get paid?


  20. - RNUG - Tuesday, Sep 1, 15 @ 9:00 pm:

    Four key points:

    1) The rating agencies don’t like uncertainty.

    2) Businesses don’t like uncertainty; they can’t plan if they don’t know the (tax, etc.) rules.

    3) Illinois needs a REAL plan, not the Turnaround Agenda, to pay the bills.

    4) Having a plan means having a balanced budget … which means increased revenue.


  21. - rural observer - Wednesday, Sep 2, 15 @ 7:18 am:

    Bruce Rauner pays 4.6% on his earnings for combined property tax, income tax, sales tax, and fees. The greeter at Wal-Mart pays 13.2%. Is the math all that hard to understand? Illinois needs a graduated income tax, period. In the mean time, raising the income tax to 13%, the highest rate in California and allowing one for one credit for other taxes against the income tax, such as property tax, combined with an increase in personal deduction would insulate the poor and middle class from that 13% and skin the fat cats like Rauner. Totally constitutional.


Sorry, comments for this post are now closed.


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