Quinn pushes pension 'compromise' as state's bond rating is downgraded

By Jamey Dunn

As the state’s credit rating takes another hit, Gov. Pat Quinn has thrown his weight behind a pension reform proposal backed by Senate President John Cullerton.

Standard & Poors downgraded the state's bond rating from an A to an A-, which means Illinois could pay more interest on the $500 million in general obligation bonds it plans to sell next week. S&P also gave Illinois a “negative” outlook for the future.

 “The downgrade reflects what we view as the state's weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” S&P credit analyst Robin Prunty said in a written statement.

The report from S&P said the state could face a further downgrade if there is no progress on pension reform. “While it is unusual for a state rating to fall into the 'BBB' category, lack of action on pension reform and upcoming budget challenges could result in further credit deterioration, particularly if it translates into weaker liquidity.” The report said that the outlook could move to stable if lawmakers address the underfunding of the pension system, reduce the backlog of unpaid bills and address structural budget issues. However, the analysts at S&P appear doubtful that all of that can be accomplished. “We believe there is limited upside potential for the rating in the next two years, given the size of the accumulated deficit and the liability challenges Illinois faces, but will evaluate the state's progress in addressing key budget and pension challenges.”

After having no luck trying to get pension changes through the House during the lame-duck session earlier this month, Quinn today called on lawmakers to support Senate Bill 1. “We’re concerned obviously at all times about our credit rating,” Quinn told reporters in Chicago. “The credit rating agencies aren’t going to give us better marks until the legislature deals with Senate Bill 1 and gets the job done. And that’s really — I think — the message that the credit rating agencies are screaming at the top of their voice[s]. I’ve heard, and I think members of the legislature need to pay attention, as well.”

Cullerton opposed legislation under consideration in the House during the lame-duck session because he said it is unconstitutional. “The Constitution says you can’t unilaterally pass a law taking away people’s pension benefits. You have to ask them to do it contractually,” Cullerton said on the last day of the lame-duck session. He believes that to pass constitutional muster, some consideration must be given to workers for any reduction in their benefits. Legislation that passed in the Senate last year would have asked employees to choose between their compounded-interest cost-of-living adjustments or state-subsidized retiree health care. “Their bill unilaterally takes away people’s rights in exchange for nothing. That’s why it’s unconstitutional.”

Cullerton has pitched SB1 as a compromise. It contains the proposal that was being considered in the House. That provision would temporarily freeze cost-of-living increases, require higher contributions from employees, put a cap pensionable salary and include a guarantee that the state makes its annual required contribution to the pension systems. The bill also tacks on the proposal that Cullerton believes is constitutional. If the Supreme Court were to rule the House plan constitutional, it would become the law. But if the court rejected the House proposal, the Senate version could then be considered.

Northbrook Democratic Rep. Elaine Nekritz, who spearheads the issue in the House, said she is open to the idea of a bill that combines both concepts, but she thinks SB1 is not quite there yet. “I’m all for compromise and for finding a way to work this out,” she said. “The challenge is making them work together in a way that we can present a fair case to the Illinois Supreme Court on both.”

Even if a compromise that combines the plans can be reached, there is no guarantee that the court would rule either plan constitutional. The S&P report today took a pessimistic tone about Illinois realizing any pension savings in the near future. “While legislative action on pension reform could occur during the current legislative session and various bills have been filed, we believe that legislative consensus on reform will be difficult to achieve given the poor track record in the past two years. If there is meaningful legislative action on reform, we believe that there could be implementation risk based on the potential for legal challenges, and it could be several years before reform translates into improved funded ratios and budget relief.” Nekritz said of today’s credit downgrade: “We had to think if we didn’t take action, that this would happen. It’s distressing to me.”