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Another downgrade coming?

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Illinois

* Buried in the middle of yet another story on the lack of Illinois pension reform progress was this nugget…

Standard & Poor’s removed Illinois’s A- rating from negative watch on Wednesday, a designation that usually signals a downgrade is imminent. In doing so, the New York-based company kept Illinois one step higher than Moody’s and Fitch Ratings. Fitch dropped Illinois in October to BBB+, the third lowest investment grade, and Moody’s cut its rank to the equivalent Baa1 later that month.

* Some of the aforementioned pension stuff…

“What’s the root cause of why we’re in the problem we’re in?” [Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services] said. “It’s down to the pensions.”

Illinois is like a patient in the emergency room, said Paul Mansour at Conning, which oversees $11 billion of munis, including Illinois securities. The budget stalemate is the crisis at hand, and the unfunded pension liabilities is the chronic disease that’s only getting worse. The budget standoff is hurting future negotiations on pension changes, he said.

“It’s not an atmosphere of conciliation and compromise,” said Mansour. “It’s an atmosphere of conflicts.”

posted by Rich Miller
Monday, Jan 4, 16 @ 9:27 am

Comments

“The budget stalemate is the crisis at hand, and the unfunded pension liabilities is the chronic disease that’s only getting worse.”

Illinois 2016 in a nutshell.

– MrJM

Comment by @MisterJayEm Monday, Jan 4, 16 @ 9:34 am
Which would leave 10 more downgrades to go before the Rauner-Madigan-Cullerton team ties the Quinn-Madigan-Cullerton team’s record.

Comment by Too Little Too Late Monday, Jan 4, 16 @ 9:47 am
When personal income taxes were cut from 5% to 3.75%, a bunch of new jobs were created. We know this because tax cuts create jobs. And by having more people working, it actually increases tax revenue for the state, even when the rate goes down. So, Illinois should take the increased tax revenue, created by the tax cut, and plug the pension hole. /s

Comment by Fusion Monday, Jan 4, 16 @ 9:48 am
it hurting negotiations on pension changes???? why the rush for changes… not to mention thenobvious bias. how about its affecting negotiations on pension funding….. a large part of the pension funding problem is the artificial ramp payment.

here are some solutions. first, mandate that the 11% of salary match has to be made for the reg employees (they pay 4% for a total 15% contrib per year) then negotiate for the employees to pick up 7% of the cost reducing the state peremployee to 8%.

get rid of the ramp period.
for the funds which were raided enron style, establish 3 new funding sources to make up the backlog.
1. 10 billion bond payment. the state took out 10 billion in bonds to fund the pensions. they then redirected 10billion in payments wiping out the benefit, but i digress. when these bonds are paid direct the bond paymnet money as contributions to the retirment funds.

2. chicago casino - split that tax with chicago, and put the states half entirely into her pension funds.

3. marijuana. legalize it. like the lottery make the state the only lawful grower and seller; the. contract out for these services in exchnage for anpercentage of the profits. also tax the sales. put all the money raised into paying down the pension liability.

4. continue tier 2 system. it bring in more then it will cost.

Comment by Ghost Monday, Jan 4, 16 @ 9:49 am
What conciliation and compromise? Are we going down the fantasy pension fix road again? Even in the unlikely event that the pension clause of the Illinois constitution is changed, that will only apply going forward. The only question left is who pays. Our political masters have to know this. How long will they pretend otherwise.

Comment by Cassandra Monday, Jan 4, 16 @ 9:49 am
From the article: “What’s the root cause of why we’re in the problem we’re in?” [Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services] said. “It’s down to the pensions.”

This is false. The “root cause” of “the problem” — the credit downgrades — in the short-term is the rollback of the 2014 income tax rates. With those rates in place, there was no budget shortfall, and the pension contribution was being paid in full.

In the long-term, the “root cause” is the flat income-tax rate structure that does not reflect the increasing shift of income to the rich and away from the middle class, coupled with the narrow sales tax that does not capture economic activity in the service sector.

Comment by Reality Check Monday, Jan 4, 16 @ 9:54 am
“Which would leave 10 more downgrades to go before the Rauner-Madigan-Cullerton team ties the Quinn-Madigan-Cullerton team’s record.”

You people have had two weeks to come up with some new material, and the best you can do is this tired and silly false-equivalence?

Superstars!

– MrJM

Comment by @MisterJayEm Monday, Jan 4, 16 @ 9:58 am
Ghost

Who are you talking about paying 4% of the 15%?

When people say stuff like this it leads some uninformed (and usually hysterical types) to extrapolate this number to everyone.

There are 5 different pension funds. Many of the members of these funds have radically different contracts, payments, etc. It’s almost impossible—and should be!!!– to talk about pension fund contributors as one group.

I, for one, have never paid a penny less than my full employee contribution , which is nowhere near as little as 4%. I have never received free health insurance coverage during my employment and not in retirement. I have no idea who these people who are in the state pension systems are that get such benefits but I will tell you that many people I know make disparaging comments about how luxurious a life I lead. I don’t know how they can be so misinformed. I think it is by laziness and by choice because it’s easy to take numbers they’ve heard and just regurgitate them.

But comments like paying only 4% or paying nothing (to leave the rest of it to the downtrodden taxpayer—-as if I were not one of them) lead many lazy learners down the wrong road to ignorance.

Comment by Anonymous Monday, Jan 4, 16 @ 10:05 am
The State of Illinois is like a 22 year old that just figured out they have to repay their student loans and credit cards.

===With those rates in place, there was no budget shortfall, and the pension contribution was being paid in full.===

There was, however, a “structural budget gap” and the state was paying billions of dollars late.

===continue tier 2 system. it bring in more then it will cost.===

At some point in time y’all might have a hard time finding skilled people to work for you.

Comment by Anon Monday, Jan 4, 16 @ 10:19 am
@Too Little, Quinn doesn’t own the pension problem any more, your guy is sitting in the big chair now and like Quinn, he will ultimately be held responsible by how well he can improve the health of this state. I wish him luck.

Comment by The Dude Abides Monday, Jan 4, 16 @ 10:20 am
The state has passed one unconstitutional pension bill. It is highly unlikely that passing another will fool the rating agencies.
If those for fiscal rectitude want to save the state money, they would propose a plan to pay for unfunded liabilities in the most expeditious manner possible. Then the bond ratings would improve, lowering bond costs.Nothing else works

Comment by Truthteller Monday, Jan 4, 16 @ 10:32 am
diagnosis: structural deficit disease which since it has gone untreated has led to pension liability syndrome. The cure is to start a prescription of “taxincreasespendingcutpension paymentenoughis. Also a steady implementation of tier 2 vitamins and exercise will continue to help in the long term.

Comment by Facts are Stubborn Things Monday, Jan 4, 16 @ 11:28 am
@Ghost - Monday, Jan 4, 16 @ 9:49 am:

=here are some solutions. first, mandate that the 11% of salary match has to be made for the reg employees=

The mandating of increased contributions by employees is unconstitutional because it has the obvious effect of diminishing their pension payment.

Comment by Facts are Stubborn Things Monday, Jan 4, 16 @ 11:33 am
Very interesting article from Chicago magazine, linked below. Seems the state constitution requires payment of pensions is contractually guaranteed. Funding is not. Pensions have been underfunded for decades. Why is it an emergency now? http://www.chicagomag.com/Chicago-Magazine/The-312/December-2012-1/Illinois-A-Long-History-of-Underfunded-Pensions/

Comment by Jomike Monday, Jan 4, 16 @ 11:34 am
@Jomike - Monday, Jan 4, 16 @ 11:34 am:

Very interesting article from Chicago magazine, linked below. Seems the state constitution requires payment of pensions is contractually guaranteed. Funding is not. Pensions have been underfunded for decades.

You are correct, and the ISC confirmed that very forcefully in their recent May 8, 2015 ruling that found SB1 (pension reform law) unconstitutional. The judiciary branch is upholding the constitutional provision that does not allow pensions to be diminished, but they are also trying to give difference to the other two branches of government on how they accomplish that.

Comment by Facts are Stubborn Things Monday, Jan 4, 16 @ 11:39 am
What does “pension reform” mean at this point?

The Supremes say you have to pay. All the rest is spin.

Comment by wordslinger Monday, Jan 4, 16 @ 11:42 am
Pensions are an emergency now because even though nothing has changed in terms of the “pot”, it is a political tool used to rile up the uninformed masses into anger at a particular segment of the population. Raising much needed revenue can be blamed on these people who have done nothing but pay from every paycheck just like everyone else in this state has. They’ve paid the same taxes everyone else has too. But they are convenient villains from which to steal even more from. Those who are not in the pension systems have someone to focus on while the connivers and predators turn the attention away from their massive piles of cash. Don’t look their way, since they have so much! The average person might start asking them to pay more! Look at greedy middle class workers instead……….and who better than those whose incomes are publicly available?

Comment by Anonymous Monday, Jan 4, 16 @ 12:03 pm
Jomike,

The pension problems predate the 1970 Constitution. The 1970 Con-Con delegates thought they fixed it with the pension clause. The then new income tax fixed things for a couple of years since there was extra money until the GA overspent and decided to short the pension payments. The resulted in the IL SC ruling in IFT in 1975 about the funding not being protected. All the rest since then has just been ‘wash and repeat’, including the SB-1 decision everyone except Sidley expected. The only partial surprise was Kanerva but some of us even expected it.

I’ve wrote a lot about it but, as others have noted today, the only real solution is to figure out a consistent way to (re) pay the sorted pension fund payments.

Comment by RNUG Monday, Jan 4, 16 @ 12:31 pm
“In the long-term, the “root cause” is the flat income-tax rate structure that does not reflect the increasing shift of income to the rich and away from the middle class, coupled with the narrow sales tax that does not capture economic activity in the service sector.”

This is so pathetic, the root cause is the outrageous benefits “guaranteed” to public union workers. This is killing Illinois. Higher and higher taxes will only quicken the death.

Comment by Tone Monday, Jan 4, 16 @ 12:38 pm
“The mandating of increased contributions by employees is unconstitutional because it has the obvious effect of diminishing their pension payment.”

In what way does it “diminish” their benefit?

Comment by Tone Monday, Jan 4, 16 @ 12:40 pm
RNUG, and Facts,

Thank you for your comments. I also like the comments by anon@12:03. It seems to me that public employees are being made scapegoats. I just don’t understand the reasoning. As RNUG said pension funding has been an issue for several decades. But it seems like the last few years it is being made out to be an insurmountable task to fund or even make an effort to properly fund the pensions. Why is it even necessary to properly fund the pensions? The state shouldn’t be considered bankrupt anymore than a family that takes out a 30 year mortgage. Neither can pay the debt today, but they don’t have to. They only need funds to pay the monthly payment. It seems to me that this is much ado over nothing.

Comment by Jomike Monday, Jan 4, 16 @ 1:00 pm
Tone, try this. I owe you $100, 000. I’ll gladly give you your $100,000 after you first give me $50,000. Arithmetic, what a concept!

Your wrong on both counts, take a look at the effective state and local tax rates by income bracket. Also, look at the increase in the fraction of personal income in IL going to the top 10% and 1%. There’s a structural problem there.

Comment by X-prof Monday, Jan 4, 16 @ 1:11 pm
Jomike,

The reason it is more of a problem today is the 1995 Edgar ‘ramp’ law. As a result of somewhat following that plan (flawed design feature), the pension funding / make-up repayment is taking a larger and larger slice of the general revenue, squeezing out other State needs and (so-called) discretionary spending. As long as the state income tax was at 5%, in was being coped with. Now, with the income tax at 3.75%, the hole is too big to be papered over.

Comment by RNUG Monday, Jan 4, 16 @ 1:14 pm
RNUG,

Thanks for that information. It seems a shame that the state won’t do what is necessary, i.e. return the income tax rate to 5% so they can cover the minimum obligations they have created. As has been posted here many times, there are many options to increase funding. There doesn’t seem to be any desire to do so.

Comment by Jomike Monday, Jan 4, 16 @ 1:25 pm
What I think many in government are awaiting is a local unit of Illinois government defaulting on a pension payment in one of the smaller of the 600 plus government pension plans in Illinois. Absent an unlikely prior decision by the state legislature to permit a federal bankruptcy filing, such an event would put the issue of funding versus payment squarely before the ISC. And that is when, most likely, the ISC will issue an order finding a plan in breech but explaining the ISC’s inability to force another branch of government to pay.

This could also occur outside of Illinois in another local government in a state with a similar constitutional public pension protection framework and lack of a federal bankruptcy outlet.

Right now the issue of funding is purely political. The pols are trying to figure out how to best serve their main agenda of gaining and retaining power. Increase taxes and anger the private sector or leave things as they are. Chicago and Cook County presently are taking the anger the private sector route. We’ll see how that works out.

Comment by Cook County Commoner Monday, Jan 4, 16 @ 2:04 pm
@Jomike - Monday, Jan 4, 16 @ 1:00 pm:

For many years the citizens of Illinois have received state services that they were not properly taxed to pay for. Instead of raising taxes, the pension system was not properly funded. The courts have made it clear for years that the benefits must be paid, but they have left the funding to the legislative and executive branch. The pension clause of the constitution was thought to - in an indirect way - force the state to properly fund pensions because the pension clause made it clear the benefits must be paid so logically they must be funded. The legislature and Gov. Quinn did a pretty good job of blaming the retirees and claiming a crisis. As the ISC pointed out, the crisis was largely one of the states own making.

Comment by Facts are Stubborn Things Monday, Jan 4, 16 @ 4:02 pm
It’s always the Pensions. Nothing else in the state and local budgets. Of course not. What a bunch of idiots!

But make no mistake it is one of many serious issues and if the stock market tanks it will get much worse and very quickly.

Comment by Federalist Monday, Jan 4, 16 @ 5:17 pm
With commenters like Too Little, it is always the spending side. Never how and what revenue is collected. It’s trickle down economics.

Comment by Southern Illinois Hoopdee Monday, Jan 4, 16 @ 8:57 pm
As far as Tone goes, I bet he’s perfectly OK with the regressive nature of the current IL tax system. At least that is what I will assume until he says otherwise.

Comment by Southern Illinois Hoopdee Monday, Jan 4, 16 @ 9:00 pm