State faces credit downgrade and underfunded capital plan

By Jamey Dunn

Illinois continues to struggle with fiscal challenges as another credit downgrade looms, and Gov. Pat Quinn reveals a funding shortfall in the state’s capital construction program.

Moody’s Investor services downgraded the state’s bond rating in January, making Illinois the lowest rated state in the country, according to the bond-rating agency. Yesterday, Moody’s issued a warning by changing the state’s credit outlook from stable to negative. The change is not a downgrade of the state’s rating, but such a move can often be a precursor to a downgrade. “This is kind of like the teacher having the parent discussion saying if the student doesn’t get it right, we’re going to have to give him this grade for the future. It’s like an intervention. If we don’t get it right, it’s going to go down,” said Illinois Treasurer Dan Rutherford.

The rating agency zeroed in on the state’s massively underfunded pension system and the lack of action from lawmakers to address the problem. “The negative outlook reflects our view that the state's pension funding pressures are likely to persist and perhaps worsen in the near term,” said the ratings report from Moody’s. “If the legislature in coming weeks or months enacts significant pension reforms, they are almost certain to be challenged, given the state's constitutional protection of retiree benefits. Political pressures, coupled with the threat of litigation, may mean that any reforms enacted have only a marginal effect on liabilities.” However, the agency also noted the state’s billions in unpaid bills and other budget woes. “The state's existing tax structure will not provide enough revenue to address the rising cost of pension benefits and other state expenses. In addition, the state's payment backlog remains high.”

Quinn’s administration is focusing on Moody’s scrutiny of the pensions system. “The problem is unless we reform our pensions system we will continue to have problems from the credit rating agencies downgrading our credit, and that’s not helpful for building jobs in Illinois. We want to build roads and repair roads, improve our bridges and take care of our rail systems. All of that is requiring us to issue bonds, and if our bond rating is declining that’s very bad for jobs,” Quinn told reporters in Chicago today. “So I think it’s important for the legislature to understand that until we address the pension reform challenge, we will continue to have problems with our bond rating.” He added, “If we repair the pension situation, we can have a stronger economy a better credit rating and a better future.”

Rutherford noted that lawmakers are interested in taking up a host of issues during the January lame-duck session—including same-sex marriage, gambling expansion and legislation to give immigrants, who are in the country illegally, access to driver’s licenses. But he said pension reform should take priority over all of those issues. “I understand all of those are important for certain constituencies, but for the future of the state of Illinois, there is absolutely nothing more important than [pensions reform.]”

Quinn also discussed proposals to bring in more revenue for the state’s capital construction plan, which he says is underfunded. One of the major funding sources for the plan, which passed in 2009, is video poker. Legalizing video poker took longer than expected and is just starting to roll out in bars and restaurants across the state. Several local governments also opted out of having legal video poker in their jurisdictions. For more on why revenues from video gaming fell short, see Illinois Issues April 2010. 

Fox News Chicago reported that the governor has floated several revenue options via a memo to lawmakers to help close an estimated $250 million to $300 million gap. Quinn said today that some of the proposals on the memo come from his office and some come from legislators themselves. “There are some things I have talked about over many years of closing corporate loopholes and other loopholes that don’t produce economic growth or jobs. I think we ought to close loopholes and use that money to create jobs to help build more roads, repair our roads.” One proposal Quinn is backing is an idea he pitched in his budget proposal this year. He supports eliminating a specific tax exemption for oil companies that drill in the ocean and sit on the intercontinental shelf. There is a federal exclusion for such companies, and since Illinois’ tax code mirrors the federal code in most instances, there is a state exemption as well. At the time of his address, he estimated that eliminating such an exemption could bring in $75 million annually.

However, Quinn said he does not support increasing the tax on gas. “If we’re going to have safe roads, we’ve got to make sure we invest in in road construction and road repair and bridge repair. We’re not going to do that through a gas tax. I’m opposed to raising the gas tax.”