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*** UPDATED x1 *** Moody’s warns against reducing pension contributions

Thursday, May 31, 2018

* Moody’s press release…

When fiscal 2019 begins on July 1, the State of Illinois (Baa3 negative) faces a sharp jump in its budgetary fixed costs for debt service, retiree healthcare, and pension contributions, part of a trend that may intensify in future years, Moody’s Investors Service says in a new report. A failure to adopt mitigating strategies soon will greatly increase the state’s risk that these rising costs will become unaffordable without severe public services cuts.

Without any revenue increases or legislation to reduce the state’s retirement benefit burden, Illinois’ total fixed costs will reach or exceed 30% of state-source revenue next year, with pensions accounting for more than half of the costs. Debt service, reflecting the state’s issuance of $6 billion of bonds in November 2017 to help reduce a backlog of unpaid bills, is scheduled to increase by 17%.

“Given their magnitude and growth trajectory, the state’s unfunded pension liabilities will likely require more than a single response,” said Moody’s analysts Ted Hampton and Tom Aaron, co-authors of the report. Illinois could raise revenue, shift some of the funding responsibility to local governments and public universities, or seek to reduce benefits. All of these approaches face potential political or even legal impediments, but the risks of inaction are significant for the state’s credit quality.

“Under some scenarios, Illinois could eventually find the burden of paying for retirement benefits becomes extremely difficult to manage,” Hampton said. “Part of the problem is that state officials always face the temptation of making the ultimate reckoning worse by pushing costs to the future, and they’ve used that approach many times in the past.”

In 2017, Illinois managed to keep the impact of its fixed costs from exceeding 30% of own-source revenues – approximately triple the median level for US states — by increasing income tax rates to boost revenues and passing legislation requiring that recent actuarial assumption changes be phased in over five years.

However, the growth of Illinois’ projected pension funding requirements will outpace its organic growth of tax revenues and the state’s economy. Moody’s says it anticipates that the state’s economy will continue to lag national trends as in recent years.

Severely unfunded pension liabilities leave Illinois far more exposed to adverse events such as a recession. Illinois’ pension funding needs will remain elevated even under favorable circumstances, but if the coming years include a recession and stock market downturn, the state’s funding burden could quickly become unsustainable without painful corrective actions.

“Illinois does have some ability to keep pushing costs to future years, in view of its plans’ assets on hand, but a decision to reduce current pension contributions would cast doubt on the state’s long-term ability to afford both accumulated liabilities and current services,” Aaron says. “Easing funding in favor of fiscal relief could erode the state’s credit.”

It’s unclear if Moody’s is aware of the pension proposals in the new budget.

*** UPDATE *** I asked David Jacobson, Moody’s VP for communications, if the ratings firm was aware of the pension changes in the BIMP. His e-mailed response…

We are, but don’t comment on pending legislation. Should this become official we will analyze the credit implications.

- Posted by Rich Miller        

14 Comments
  1. - Harry - Thursday, May 31, 18 @ 10:08 am:

    You may wonder if Moody’s knows about the BIMP–my guess is they might, but maybe someone can explain to me the long-term implications of Systems that are 35-45% funded, buying out benefits at 60-70%. It reduces State contributions in the short run, but in the long run it deepens the hole to be filled by 2045.

    More of the same old same old.


  2. - Smalls - Thursday, May 31, 18 @ 10:08 am:

    == It’s unclear if Moody’s is aware of the pension proposals in the new budget.==

    Rich, it is likely that they are aware of the proposals, and that is why they are issuing their warning. The state is again counting 100% of future savings against the current year budget and pension contributions. That is the problem.

    Beyond that, these gimmicks do very little to solve the much larger long-term issues.


  3. - Rich Miller - Thursday, May 31, 18 @ 10:09 am:

    ===It reduces State contributions in the short run, but in the long run it deepens the hole to be filled by 2045.===

    I’m pretty sure that it would reduce the potential unfunded liability over the long term.


  4. - walker - Thursday, May 31, 18 @ 10:16 am:

    A warning not to play games. Just pay up.


  5. - Dozer - Thursday, May 31, 18 @ 10:16 am:

    Interesting timing of Moody’s report. In other words reduce benefits or raise taxes neither of which is done in new FY 19 budget. Pension buyouts are chump change both in the short and long term liability. Perhaps the folks at Moody’s would like to run for office and try implementing their proposals?


  6. - Smalls - Thursday, May 31, 18 @ 10:21 am:

    == I’m pretty sure that it would reduce the potential unfunded liability over the long term.==

    Rich, you are correct that it would reduce the unfunded liability by the $450 million in the long run. However, the problem is that they are taking all of that savings in year 1. Instead, that savings should be amortized over the same period that they are amortizing the unfunded liability. Say that is 30 years, then they should only be reducing the annual pension payment by $15 million per year ($450/30).

    Or in reality, they shouldn’t reduce the payments at all and increase the funding level.


  7. - Rich Miller - Thursday, May 31, 18 @ 10:25 am:

    Thanks, Smalls.


  8. - Deadbeat Conservative - Thursday, May 31, 18 @ 10:59 am:

    =A warning not to play games. Just pay up.=

    The warning, while appropriate, will go right over the heads of IL voters and policymakers. IL has been all about costly gyrations and deferments forever.
    IL has proven time and time again it would rather pay the interest than deal responsibly with its debts.


  9. - cannon649 - Thursday, May 31, 18 @ 11:18 am:

    Again - a Budget idea that will not generate the stated “savings”

    taking all “savings” in year 1 - will not generate real “cash”

    Can not see many that will give up their Hugh retirement benefits for 60% - maybe if they are on deathbed with no defendants and on your way to Vegas


  10. - RNUG - Thursday, May 31, 18 @ 11:24 am:

    Translation: Moddy’s doesn’t think the pension savings will happen, so don’t recalculate this year’s contribution.


  11. - wordslinger - Thursday, May 31, 18 @ 11:45 am:

    –I asked David Jacobson, Moody’s VP for communications, if the ratings firm was aware of the pension changes in the BIMP. His e-mailed response…

    We are, but don’t comment on pending legislation. –

    Demonstrably untrue, as the NYT kids like to say.

    The ratings comment on possibilities all the time. “Do this, or you’ll get whacked; don’t do this or you’ll get whacked.”

    They might couch the language, but the underlying messages are hardly subtle.


  12. - wordslinger - Thursday, May 31, 18 @ 1:14 pm:

    –I just need them to continue to play games for about 10-12 more years until my last child is out of school and then we can dump the house and get what we can and get out of Dodge. –

    You’re thinking small. The United States is a highly mobile society for those with drive and ambition.

    Why would you stay in a place 12 years when you don’t want to? That’s a big chunk of life. Unless your feet are in cement, you could get the ball rolling now.

    Or, maybe you just like beefing. No shortage of that.


  13. - City Zen - Thursday, May 31, 18 @ 3:06 pm:

    ==Why would you stay in a place 12 years when you don’t want to?==

    Yes, why can’t he/she and his/her spouse simply find equal or better employment in another state while working said current jobs, and simultaneously perform a cross-country search on housing and school districts, all the while attempting to sell their current house with usurious property taxes? Must lack the “drive and ambition” you speak of.


  14. - wordslinger - Thursday, May 31, 18 @ 4:33 pm:

    Gee, CZ, you’re kind of lacking in the old pioneer/immigrant spirit that built the country.

    Did someone tell you that you were entitled for all good things to come easily? They weren’t doing you any favors.

    But if you’re miserable somewhere, waiting around 10-12 years for something to happen isn’t the best plan. Life’s too short. Make a move.

    Unless, of course, the joy just comes from the beefing.


Sorry, comments for this post are now closed.


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