S&P downgrades Illinois a notch
Monday, Oct 3, 2016 - Posted by Rich Miller
* Reuters…
S&P Global Ratings dropped Illinois’ credit rating one notch to BBB on Friday and warned it could fall further absent a long-term solution that deals with the state’s chronic structural budget deficit and pension woes.
“The downgrade reflects our view of continued weak financial management and increased long-term and short-term pressures tied to declining pension funded levels,” said S&P analyst John Sugden in a statement.
Illinois, the lowest-rated U.S. state, is in its second straight fiscal year without a complete budget due to an impasse between its Republican governor and Democrats who control the legislature.
The impasse, along with a $111 billion unfunded pension liability and a growing pile of unpaid bills have pounded Illinois’ credit ratings into the low-investment grade triple-B level.
S&P said another downgrade could follow “should the state continue to demonstrate a lack of ability or willingness to adopt a long-term structural budget solution that also incorporates a credible approach to its long-term liabilities.”
* Moody’s kept its rating level, but wasn’t all that glowing, either…
Summary Rating Rationale
Moody’s Investors Service has assigned a Baa2 rating to the State of Illinois’ $1.8 billion of general obligation (GO) bonds in two series, the General Obligation Refunding Bonds, Series of October 2016, and General Obligation Bonds, Series of November 2016. The rating factors in severely underfunded pension plans, failure to address a structural deficit because of a political impasse, and narrow operating fund liquidity that is driving up a backlog of unpaid bills. Offsetting these challenging conditions are the state’s large, diverse economic base; legal provisions that ensure continued debt payment even with no enacted budget, and the powers common to US states, such as control over revenue and spending. […]
Credit Challenges
» Political paralysis that has impeded efforts to pass appropriation legislation or achieve structural balance for a second year
» Severe pension funding shortfall and growing adjusted net pension liability (ANPL)
» Chronic use of payment deferrals to manage operating fund cash
» Weak management practices shown by pension underfunding, payment delays and recurring negative fund balances
* And while everybody talks about pensions, Greg Hinz concludes it’s time to just fund ‘em fully and move the heck on…
That, though, still leaves the mortgage—the $111 billion owed to Tier 1 folks, money that justices have ruled we cannot avoid paying.
Some say the state ought to ignore the Supreme Court and stiff the pensioners. Not in this state. Others argue that a “consideration” model could be used to cut benefits in Tier 1. That’s a long shot. So is amending the constitution. As for declaring bankruptcy to shed the debt, it’s not legal for states. I like the idea of lump-sum employee buyouts, but where do you get the lump sum?
That leaves one solution: Suck it up and pay. That won’t be easy. A recent blog post by economists at the Federal Reserve Bank of Chicago concluded, “Illinois has little room to increase taxes without reducing economic activity in ways that would be damaging.”
But instability is more damaging, I now think. Delaying the day of reckoning just drives up the ultimate price tag. And maybe it all doesn’t have to come from taxes. Perhaps public employee unions can be convinced to make concessions on pay or work rules in exchange for the luxurious guaranteed 3 percent annual increases they’re getting in pension benefits at a time of 1 percent inflation.
If the state’s economy remains slack and investment returns remain low, Illinois and a lot of other states are going to have big, big problems. But at least we won’t be denying reality and can-kicking anymore. That would be a start.
- Dome Gnome - Monday, Oct 3, 16 @ 9:58 am:
I’m not advocating for this, but I seem to remember that Fortner’s plan for lump-sum buyouts involved private vendors.
- PublicServant - Monday, Oct 3, 16 @ 10:08 am:
===S&P said another downgrade could follow “should the state continue to demonstrate a lack of ability or willingness to adopt a long-term structural budget solution that also incorporates a credible approach to its long-term liabilities.”===
But the governor is up with a term-limits commercial…Yeah. Pay no attention to the man behind the no-budget-talks-TA curtain. It really shows his continued disdain for the citizens of Illinois.
- Cassandra - Monday, Oct 3, 16 @ 10:12 am:
Yet our political masters of both parties continue to pretend that the pensions can be cut. Have any of them said that we’ll have to pay up. Indeed, isn’t there another Quinn-like pension “reform” plan in the hopper from the Rauner admin. No wonder folks keep coming up with these, um, unrealistic reform ideas, including on this blog. Like, changing the constitution. C’mon.
They’re all waiting for Superman, a judge or some other external force to make things right (probably with a huge tax increase on the middle class) so the legislators can claim Superman made them do it.
This could still take a while though.
- Sir Reel - Monday, Oct 3, 16 @ 10:12 am:
Hinz gets it. Quit looking for the easy way out. It doesn’t exist.
Pay the bill. Bargain hard with the union so future pensions are minimized.
Of course neither the Governor and his superstars, nor the General Assembly will do it. They can’t believe there isn’t an easy way out.
- Winnin' - Monday, Oct 3, 16 @ 10:18 am:
@fakeBruce to Cabinet
Great work, team! Remember, I’m takin’ the bullets.
- Earnest - Monday, Oct 3, 16 @ 10:19 am:
>That leaves one solution: Suck it up and pay
Nothing like a cold, hard fact to get in the way of playing the blame game or of digging the hole ever deeper while talking about other issues.
- Matt Belcher - Monday, Oct 3, 16 @ 10:21 am:
Are S&P Global Ratings and Moody’s any kind of fiduciary representative of these “investors from all over the world” described by Chris Kennedy last week? Asking for a friend.
From: https://capitolfax.com/2016/09/28/edgar-kennedy-take-turns-whacking-rauner-trump/
“Dealing with companies involved at the Merchandise Mart, he said, ‘Not one of them ever asked me about redistricting reform or term limits or tort reform or workers’ comp,’ which are among things Rauner has wanted to get as part of his turnaround agenda.
But in dealing with the ‘billion-dollar’ Wolf Point development, he said, investors from all over the world are asking, ‘Why should we invest in the only state that doesn’t have a budget? It’s rattling people. It’s taking a state budget problem … and turning into a statewide economic crisis, and it’s scaring people away. It’s creating uncertainty, and that’s bad for the economy.’”
- Handle Bar Mustache - Monday, Oct 3, 16 @ 10:25 am:
Inept!
… weak financial management …
… the lowest-rated U.S. state …
… a growing pile of unpaid bills …
When does Governor Rauner accept responsibility for this? Maybe in his next term?
- wordslinger - Monday, Oct 3, 16 @ 10:29 am:
Did S&P take into account that the governor has a sappy, ego-stroke image spot, ostensibly about term-limits, running right now in the midst of a presidential race?
Doesn’t that demonstrate his ability and willingness to prioritize and deal with pressing matters?
- illinoised - Monday, Oct 3, 16 @ 10:33 am:
Dear Governor Rauner,
Illinois needs a budget.
Signed,
S&P Global Agents
- illinoised - Monday, Oct 3, 16 @ 10:34 am:
My bad, letter should have been signed:
S&P Global Ratings
- RNUG - Monday, Oct 3, 16 @ 10:39 am:
S&P == that also incorporates a credible approach to its long-term liabilities. ==
Moodys == achieve structural balance ==
Hinz == That leaves one solution: Suck it up and pay. ==
The cover is building for the tax increase we all know is needed.
- Ron - Monday, Oct 3, 16 @ 10:41 am:
How about we layoff all tier 1 employees? All new hires will be tier 2.
- Anotherretiree - Monday, Oct 3, 16 @ 10:48 am:
==Sir reel Bargain hard so future pensions minimized==
Pensions are an individual contract. There’s nothing for the union to bargain away. Future pensions have to be minimized by the legislature which has already happened with tier 2.
- Anonymous - Monday, Oct 3, 16 @ 11:05 am:
===How about we layoff all tier 1 employees? All new hires will be tier 2.===
You have to show cause, Ronnie. Another of your simple solutions that can’t happen. Get your head out of your posterior, and pay your bills like the rest of us.
- RNUG - Monday, Oct 3, 16 @ 11:06 am:
== How about we layoff all tier 1 employees? All new hires will be tier 2. ==
All those laid off Tier 1 employees will sue the State for wrongful dismissal and win. Even without a contract, you still have the Civil Service rules to deal with.
And if the same people are hired back, they will still be Tier 1.
The solution is what is alteady happening; you wait 30 - 40 years for the Tier 1 employees to be gone.
- Roadypig - Monday, Oct 3, 16 @ 11:08 am:
Ron- how ’bout you do a little research on accumulated debt, contract law, and the US and Illinois constitution, and then get back with us?
- City Zen - Monday, Oct 3, 16 @ 11:09 am:
==How about we layoff all tier 1 employees?==
That’s a bit severe. But a long-term Tier 1 salary freeze is probably in order. Since Tier 2 employees will receive a smaller pension, their salaries should be higher than their Tier 1 counterparts.
- striketoo - Monday, Oct 3, 16 @ 11:16 am:
1. Cut all discretionary spending 10% across the board.
2. Return the income tax to 5% and tax all retirement income over $50K.
3. A Chicago casino.
4. Legalize and tax recreational marijuana.
and most important
5. Eliminate front license plates.
- Maximus - Monday, Oct 3, 16 @ 11:20 am:
I think people were also telling Puerto Rico to “suck it up and pay” in regards to their debt. Yet now they are in a special restructuring deal and not paying large portions of their debt while the re-structuring is happening. Seems if there is no money you don’t actually pay. Bad analogy for Illinois?
- JohnnyPyleDriver - Monday, Oct 3, 16 @ 11:22 am:
Doesn’t Moody’s get it that Rauner can’t be blamed for this mess? He’s only been here for 6 months. He’s only been here a year. He’s only been here for almost 2 years.
- Ron - Monday, Oct 3, 16 @ 11:23 am:
The cause is clear. The state is broke, we can’t afford them.
- Ron - Monday, Oct 3, 16 @ 11:24 am:
Companies always layoff expensive workforces. Illinois has to do this.
- Ron - Monday, Oct 3, 16 @ 11:25 am:
Wage freeze is option 2, City Zen.
- Ron - Monday, Oct 3, 16 @ 11:26 am:
You want a job? Sure, you’re tier 2
- Ron - Monday, Oct 3, 16 @ 11:28 am:
Here’s a contract, you want your job, you get no raise for the rest of your career.
- Huh? - Monday, Oct 3, 16 @ 11:29 am:
Dear S&P Global Ratings
I don’t care what you do. I don’t work for you.
Signed,
1.4%, Campaigner in Chief of Illinois
- TinyDancer(FKASue) - Monday, Oct 3, 16 @ 11:29 am:
==How about we layoff all tier 1 employees? All new hires will be tier 2.==
Isn’t that the current CPS game plan?
It’s exactly what happens every time they close a school. It’s the real reason behind per-pupil funding - forcing the principals to choose between higher-paid experienced teachers or younger inexperienced, but cheaper ones. Those salaries used to come out of Central Office.
Makes principal the hatchet guy.
Happy New Year.
- Ron - Monday, Oct 3, 16 @ 11:30 am:
Yes, it is the rational plan Tiny.
- Past the Rule of 85 - Monday, Oct 3, 16 @ 11:32 am:
The last pension reform was done when the deficit was $100 billion and we are now right back where we started except we have a $111 billion deficit. Rauner’s superstars could start a PR campaign reminding people they’ve enjoyed decades of artificially low taxes and now the bill is due. The payback can be re-amitorized and stretched out to make each year’s payment less painful. We’ll have to pay more in the long term, but the last inept reform has cost us $11 billion so far with nothing but hot air and a deeper hole to show for it.
- NoGifts - Monday, Oct 3, 16 @ 11:55 am:
Reminding myself that Illinois Annual Gross Domestic Product is about 640 Billion https://fred.stlouisfed.org/series/ILNGSP and rising. Plus 700 Billion in personal income. https://fred.stlouisfed.org/series/ILOTOT That’s annually $1.3 trillion flowing through our state. Let’s stop saying we’re too poor to solve our problems.
- Ron - Monday, Oct 3, 16 @ 12:02 pm:
NoGifts, you do realize that Illinois has the fifth highest state and local tax burden in the nation currently.
- Last Bull Moose - Monday, Oct 3, 16 @ 12:12 pm:
No Gifts
You are double counting.
- Ebenezer - Monday, Oct 3, 16 @ 12:13 pm:
Hinz is right. The bill is going to be painful. the longer the payments are stretched out, the worse it is.
Rauner probably misjudged how much pain the system could accept at once, but when those bills start showing up on taxpayers paychecks there are going to be consequences.
Others will have better math, but roughly:
$111 billion, divided by 6.5 million individual returns filed each year works out to $17,100 per taxpayer. The annual contribution probably needs to be ~1200/taxpayer just to stay even.
- Ron - Monday, Oct 3, 16 @ 12:19 pm:
Ebenezer, we can probably wipe a lot of the pension debt by having school districts be responsible for their employees pensions. And of course allow municipal bankruptcy.
- Grandson of Man - Monday, Oct 3, 16 @ 12:36 pm:
Because we were not able to tax the rich properly through the state income tax, and people like Rauner and Griffin paid peanuts here for years, any solution should contain some mitigation toward government employees.
- Last Bull Moose - Monday, Oct 3, 16 @ 12:57 pm:
Why do people think it is OK to stiff the pensioners through bankruptcy?
A few gamed the system, but most played fair by the rules.
- City Zen - Monday, Oct 3, 16 @ 12:58 pm:
==The annual contribution probably needs to be ~1200/taxpayer just to stay even.==
Until you realize that 50% the state tax filers account for less than 10% of the total taxes paid. So you can essentially eliminate half the taxpaying population from that bill and double it for the rest.
- Ebenezer - Monday, Oct 3, 16 @ 1:19 pm:
Ron,
There is no “wiping out of debt.” You are talk about defaulting on a promise made. The system that generated those promises was reckless and often slimy, but most of the beneficiaries were just doing their job.
You might be able to transfer the cost to the localities, but the tax payers are still paying the bill.
Moral bankruptcy aside, I doubt the state can legally shift the pension obligations to the localities without providing a backstop guarantee.
- Back To Reality - Monday, Oct 3, 16 @ 1:20 pm:
Ron,
Let me try to help you understand. I agree that this is a huge mess. Supporting non-solutions doesn’t help anyone. If you believe that the cost shift will help with the pension debt, you are mistaken. You are uninformed about school district pension costs.
Pension debt = unfunded liability
You are talking about money the state already owes to the pension fund (T.R.S.). It was earned by, and is owed to pensioners. It cannot be “wished away”. The state was supposed to pay this money into the fund. It has not paid.
This “debt” includes the interest that money would have earned had it actually been put into the fund on time. Every day that bill doesn’t get paid, the interest keeps growing. The state promised to pay the interest when it kept the money it owed.
Shifting pension costs (normal costs) to local districts does nothing to reduce that which is already owed. If the “shift” was done tomorrow, none of the “pension debt problem” would be solved at all.
Lets just look at teachers. The normal cost for all downstate state teacher pensions last year was a bit over 800 million dollars. (about 9% of teacher payroll) Compare that to the 61 billion dollars the state owes T.R.S. in unfunded liability.
The pension debt is two orders of magnitude larger than the yearly normal cost. How is shifting 800 million a year going to do anything to impact that 61 billion dollar bill that keeps growing daily?
So what will actually happen when costs are shifted? Money will get even tighter for schools. Levies will be increased (where possible) on already overburdened local property taxpayers.
The state will still owe the entire unfunded liability. What problem has been solved?
The cost shift is an attempt to make it look like something is being done but really accomplishes little.
- Anonymous - Monday, Oct 3, 16 @ 1:59 pm:
If the state income tax had not been lowered and payments were made, as Quinn was doing, just think how much progress we would have made. It seems that pension funds are deliberately being stiffed. And geez, Louise, when you do that?????? We can complain about how far in debt we are! Then we can lasso up all the whiners about people getting pensions. Works well!
- X-prof - Monday, Oct 3, 16 @ 2:37 pm:
The national press is finally shining a light on how the Donald and many others like him are not paying their fair share of tax despite their wealth. When will the IL press shine a light on how Rauner and his cohort aren’t paying their fair share of overall state and local taxes?
To state the obvious, high state and local sales tax and high property taxes are a direct result of our flat and abnormally low income tax. This is the dodge that Rauner doesn’t want people to see. It’s a different mechanism, but has the same result as what Trump is playing. Both are legal because we have broken revenue systems.
Why does the IL press let them get away with it? Why do they let them hide behind the “flat income tax is fair” nonsense without exposing the regressive overall tax structure? Why not debunk the nonsense that more tax cuts, more breaks for the wealthy, and a direct assault on the middle class will make it all better?
To be fair, the leaderships of both parties have a hand in this. End of rant.
- City Zen - Monday, Oct 3, 16 @ 3:17 pm:
==If the state income tax had not been lowered and payments were made, as Quinn was doing, just think how much progress we would have made.==
If the state income tax , just think how much progress we would have made.
- wordslinger - Monday, Oct 3, 16 @ 3:55 pm:
–And of course allow municipal bankruptcy.–
Of course, Ron.
From Trump to Gingrich to Rauner, bankruptcy is the way to go in some circles.
Sorry, I grew up on Illinois Main Street, Lincoln Highway, where Republicans and Democrats thought paying your bills was a sign of character and civic virtue.
What are you bust-out schemers guys calling yourselves these days? You sure ain’t Republicans, in my book.
- illdoc - Monday, Oct 3, 16 @ 4:39 pm:
first time commenting…. I had taught part time at one of our professional schools since 1991 and after much debate I went full time in 2009. While my salary is much less at the university, I had to decide if the total package which will include my pension was worth it. I pay 8% out of each check (of which .5% is for my future 3% AAI) The ISC has ruled on the pension issue clearly, the pensions have to be paid.
- Steve Schnorf - Monday, Oct 3, 16 @ 4:44 pm:
Ron, when I was young we used to joke about people who must have been “beat with a fooley stick”. You have just reminded me of that
- TinyDancer - Monday, Oct 3, 16 @ 4:56 pm:
==Yes, it is the rational plan Tiny.==
No, Ron, actually it’s the short-sighted stupid plan.
Go run a high-poverty school staffed by a cohort of first year teachers and let us know how that works out for you.
- In a Minute - Monday, Oct 3, 16 @ 5:12 pm:
To which I would reply to Greg Hinz that a constitution is not a suicide pact.
Raising taxes in Illinois without shedding long term liabilities and reforming benefits would not help Illinois. It would actually hasten its demise.
- Tom K. - Monday, Oct 3, 16 @ 7:02 pm:
The smart ticket would be to cap real estate taxes at 1% of the market value (which should create a rebound in the housing market), and institute a progressive income tax system similar to California’s or Oregon’s, with a high top rate and a decent spread. I would think that would produce an instant surplus, and would improve our borrowing rates dramatically, further lowering the total cost of paying back the debt. And, include retirement income in it, no exceptions (that’s why the tax is progressive, so you don’t make Grandma eat cat food). All spending would be frozen with a small increase for inflation, so the new money isn’t used as a piggy bank. When the debt is paid back, the rates would be rolled back.
Think the fat cats that run this state (both parties) would ever gore their own ox? Not a chance. At least we’d find out for sure whether out-migration is affected by tax rates.
- Anonymous - Monday, Oct 3, 16 @ 9:46 pm:
==How about we layoff all tier 1 employees? All new hires will be tier 2.==
Fifty percent of CPS teachers quit within the first five years of teaching. Sixty percent of school districts across the state of Illinois are having trouble filling positions.
- Anonymous - Monday, Oct 3, 16 @ 9:58 pm:
Illinois has a teacher shortage. This is happening across the country.
http://ilnews.org/9148/illinois-teacher-shortage-looms/
- City Zen - Monday, Oct 3, 16 @ 10:05 pm:
==Illinois has a teacher shortage. This is happening across the country.==
Debunked: https://www.the74million.org/article/opinion-sorting-out-the-issues-in-the-teacher-shortage-crisis
That’s why, in our…analysis…of teacher supply and demand, we simply consider the annual demand for first-time teachers and compare this with the annual supply of potential first-time teachers. Using this definition, we show that the number of potential first-time teachers has far outpaced the demand for newly minted teachers for decades.
- City Zen - Monday, Oct 3, 16 @ 10:34 pm:
==The smart ticket would be to cap real estate taxes at 1% of the market value…and institute a progressive income tax system similar to California’s or Oregon’s…==
Oregon has no sales tax.
- Tom K. - Monday, Oct 3, 16 @ 10:41 pm:
==Oregon has no sales tax==
Nor do they have the massive debt load that we have. The sales tax is regressive, but it makes sure that everyone has some skin in the game. Again, once the debt is paid down, the rates would have to be rolled back (by statute). The 800 pound gorilla is the way-too-high interest rate we are currently paying on debt. Creating a surplus in revenue should (theoretically) knock that way back. Believe me, I’d reform the heck out of things if I had my way. But even with the reforms, the debt remains and needs to be dealt with.
- Back to Reality - Tuesday, Oct 4, 16 @ 7:23 am:
To City Zen and Anonymous:
As someone who doesn’t really know one way or the other if there really is a teacher shortage, I had a question. Is it possible that neither position discussed in this blog is accurate?
Is there a “huge” shortage or none at all? It might be better to collect data than opinions here. Who knows? Perhaps the truth lies somewhere in between?
I wonder what the people who actually do the hiring think?
Report by Illinois Superintendents published on the Illinois Association of School Boards website:
“Illinois Teacher Shortage Crisis: Survey conducted by the Illinois Association of Superintendents of Schools” (2015-16)
http://blog.iasb.com/2016/01/iarss-survey-teacher-shortages-growing.html
- TinyDancer(FKASue) - Tuesday, Oct 4, 16 @ 9:50 am:
ISBE reports that Chicago’s got a classroom teacher shortage:
http://www.isbe.net/research/htmls/teacher_shortage.htm
Gee, I wonder why.
I wish all you teacher/pension bashers would go sign up for a tour of duty on the west or south side.
THEN tell us about what a soft, cushy, overpaid job it is.
- Anonymous - Tuesday, Oct 4, 16 @ 9:51 am:
To Back to Reality:
We do have a growing teacher shortage in Illinois. But this problem is much worse in Wisconsin, Indiana, and Michigan partly because of cuts in teacher pensions in those states.
- Anonymous - Tuesday, Oct 4, 16 @ 11:35 am:
Tom, if we lowered the “interest rare” (assumed rate of return), the unfunded liability simply goes up approximately prportionately. Zero sum game.
- Tom K. - Tuesday, Oct 4, 16 @ 7:56 pm:
I believe we’re talking about two different things, Anon. If I read you right, you’re referring to the assumed rate of return that determines the “present value” of the pension liability, and you are correct in your assertion that it is a “zero sum game”.
But what I’m talking about, is the interest rate that the bond market requires Illinois to pay in order to issue new bonds, which is, I think, about two points higher than the rate for the average state’s GO bonds. The U.S. is selling U.S. treasuries at a little over 2% these days, while we’re paying 4 or 5% for our GO bonds (I think Chicago is paying a loan-shark rate of 8%). If we had a sustainable revenue surplus in the state, that rate should drop to something around 3 points, a huge difference - look up what a monthly mortgage payment would be at 3% vs. 5%, same concept.