By Jamey Dunn
The major bond rating agencies are having mixed reactions to changes to Illinois' public employee pension systems that were approved and signed into law last week.
Standard & Poor’s rating services upgraded its outlook on the state’s borrowing from “negative” to “developing.” However, the state retains its A- rating from the agency. According to S&P, the new outlook means that the agency could raise or lower the state’s rating in the next two years. “The change reflects the consensus reached on pension reform, which we believe could contribute to a sustainable path to fiscal stability,” S&P credit analyst Robin Prunty said in a prepared statement. “Although we view the consensus achieved by Illinois on this difficult issue as positive from a credit standpoint, the developing outlook reflects the implementation risk — legal and budgetary — associated with various provisions of the pension reform, as well as the overall structural budget challenges facing the state.” The new outlook comes as Illinois is planning to sell $350 million in general obligation bonds later this week.
Gov. Pat Quinn highlighted the change as a positive byproduct of the pension cuts that lawmakers approved and he signed into law. “I am pleased the ratings agencies are recognizing that Illinois is moving in the right direction,” Gov. Quinn said in a prepared statement. “As I’ve always made clear, one of the many reasons to resolve Illinois’ pension crisis was the negative impact it had on our bond rating, which cost taxpayers more money to finance critical repairs and improvements to roads, bridges and schools. This improved outlook will be the first of many positive developments towards a revitalized and stronger Illinois.”
But a change in outlook does not constitute much positive forward motion for the state, especially given how much of a beating Illinois’ credit has taken in recent years.
The two other major rating agencies, Moody’s and Fitch Ratings, both issued positive statements about the new law. But neither has opted to adjust the state’s rating or outlook. Both said they would analyze the law to determine the extent of its fiscal impact.
Supporters say it will save $160 billion and fully fund the pension systems by 2043.
Public employee unions are expected to bring a lawsuit against the state because they say the pension cuts violate the state’s Constitution, which contains an explicit protection for retirement benefits. “[Senate Bill 1] won’t save a penny. The bill is unconstitutional, so it’s savings are an illusion. It’s only going to cost the state time and money and kick the can down the road all over again,” said a statement from the We Are One Union coalition. Moody’s said in a brief analysis issued after the bill passed last week, that it would be able to factor the changes in the new law into the state’s credit rating if and when they are upheld by the courts.
All three rating agencies acknowledge that the state is facing other budget issues besides pension reform, including the loss of billions of dollars of revenue when the temporary income tax increase sunsets. The tax rate begins stepping down in 2015. Fitch’s said that the state must address some of its budget challenges to hang on to its current rating, which is the lowest in the country. “In addition to action on pensions, maintenance of the rating will require timely action on a more permanent budget solution to the structural mismatch between spending and revenues in advance of the expiration of temporary tax increases.”
Showing posts with label bond ratings. Show all posts
Showing posts with label bond ratings. Show all posts
Tuesday, December 10, 2013
Monday, June 03, 2013
Illinois bond rating downgraded
By Jamey Dunn
Illinois was slapped with yet another credit downgrade today after lawmakers failed to pass pension reform before the spring legislative session ended at midnight last Friday.
Fitch Ratings downgraded the state’s rating from an A to an A- with a negative future outlook. Lower credit ratings can mean that the state will have to pay more when it borrows for long-range costs, such as capital construction. Illinois had the lowest rating of any state in the nation before the downgrade. The ratings are meant to reflect the risk to investors that buy the state’s bonds by predicting the likelihood that the state will repay its debts. General obligation bonds are at the top of the list to be paid under Illinois’ budget and are paid under an “irrevocable and continuing appropriation” from year to year.
The credit rating agency lists legislators’ failure to act on pension reform as a primary cause for the downgrade. “The downgrade reflects the ongoing inability of the state to address its large and growing unfunded pension liability, most recently through the failure to pass pension reform during the regular legislative session that ended May 31, 2013,” Fitch’s report said. “Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable and that failure to achieve reform measures despite the substantial focus on this topic exacerbates concern about management's willingness and ability to address the state's numerous fiscal challenges.” Moody’s Investor Services warned on Friday that it also might downgrade the state’s rating if pension reform was not passed by the end of the session.
After this most recent credit downgrade was announced, politicians from both parties pointed to it as even more reason to come to a pension solution as soon as possible. “Today’s downgrade is no surprise. As I have repeatedly made clear to the General Assembly, this will continue to happen until legislators pass a comprehensive pension reform bill and put it on my desk,” Gov. Pat Quinn said in a written statement. “Every time the General Assembly misses the deadline, Illinois’ credit rating is downgraded, which hurts our economy, wastes taxpayer dollars and shortchanges the education of our children. If I could issue an executive order to resolve the pension crisis, I would have done it a long time ago. But I cannot act alone. Legislators must send me a bill to get this job done. I plan to meet with the speaker of the House and the Senate president tomorrow. I will keep fighting for pension reform until it is the law of the land.”
But it seems that each time there is movement toward a compromise, a fundamental dispute over the best way to accomplish fair and constitutional pension reform arises. Last spring, it seemed that Republicans and Democrats were close to reaching agreement on a bill, but in the closing days of the session, Democrats unveiled a provision that would have pushed future pension costs to schools outside of Chicago. The city already covers most of its pension costs. Republicans vehemently opposed the idea, saying it would increase local property taxes, and as a result, pension talks broke down, as did hopes for a bipartisan budget plan. Democrats eventually agreed to tackle the cost shift as a separate issue to break the stalemate.
This year it was Democratic legislative leaders who did not see eye to eye. Speaker Michael Madigan and Senate President John Cullerton each have their own proposed legislation. And in the last days of the session, neither was willing to back down off his preferred plan. Supporters of Cullerton’s proposal say that model, which offers employees a choice in their benefits reduction, is constitutional. They argue that Madigan’s plan, which would unilaterally cut benefits, is not. Backers of Madigan’s SB 1 say Cullerton’s plan would not save enough to stabilize the pension systems, which have an estimated $100 billion unfunded liability. Madigan’s legislation passed in the House but failed in the Senate. Cullerton’s bill, which is backed by public employee unions and teachers' unions, was approved in the Senate but was not called for a House vote.
Union leaders today called on Madigan to bring Cullerton’s SB 2404 up for a vote. “Today's downgrade was totally avoidable. Before it adjourned, the House could have passed Senate Bill 2404 — a fair, constitutional, comprehensive pension funding solution,” said a statement from the We Are One Coalition of unions. “The House must now finish its work and pass SB 2404 as soon as it reconvenes. House members and Illinois citizens have been demanding a vote for weeks — the time is now.” However, Quinn supports Madigan’s SB 1.
Some are using the downgrade to argue that Quinn should call a special session on pensions. However, the last time the governor tried that tactic, nothing was accomplished. If lawmakers want to pass something that can go into effect in the next year, they will need the support of three-fifths of both chambers. Otherwise they will have to wait until Jan. 1, when the legislative clock resets and pension reform could pass with a standard majority.
Illinois was slapped with yet another credit downgrade today after lawmakers failed to pass pension reform before the spring legislative session ended at midnight last Friday.
Fitch Ratings downgraded the state’s rating from an A to an A- with a negative future outlook. Lower credit ratings can mean that the state will have to pay more when it borrows for long-range costs, such as capital construction. Illinois had the lowest rating of any state in the nation before the downgrade. The ratings are meant to reflect the risk to investors that buy the state’s bonds by predicting the likelihood that the state will repay its debts. General obligation bonds are at the top of the list to be paid under Illinois’ budget and are paid under an “irrevocable and continuing appropriation” from year to year.
The credit rating agency lists legislators’ failure to act on pension reform as a primary cause for the downgrade. “The downgrade reflects the ongoing inability of the state to address its large and growing unfunded pension liability, most recently through the failure to pass pension reform during the regular legislative session that ended May 31, 2013,” Fitch’s report said. “Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable and that failure to achieve reform measures despite the substantial focus on this topic exacerbates concern about management's willingness and ability to address the state's numerous fiscal challenges.” Moody’s Investor Services warned on Friday that it also might downgrade the state’s rating if pension reform was not passed by the end of the session.
After this most recent credit downgrade was announced, politicians from both parties pointed to it as even more reason to come to a pension solution as soon as possible. “Today’s downgrade is no surprise. As I have repeatedly made clear to the General Assembly, this will continue to happen until legislators pass a comprehensive pension reform bill and put it on my desk,” Gov. Pat Quinn said in a written statement. “Every time the General Assembly misses the deadline, Illinois’ credit rating is downgraded, which hurts our economy, wastes taxpayer dollars and shortchanges the education of our children. If I could issue an executive order to resolve the pension crisis, I would have done it a long time ago. But I cannot act alone. Legislators must send me a bill to get this job done. I plan to meet with the speaker of the House and the Senate president tomorrow. I will keep fighting for pension reform until it is the law of the land.”
But it seems that each time there is movement toward a compromise, a fundamental dispute over the best way to accomplish fair and constitutional pension reform arises. Last spring, it seemed that Republicans and Democrats were close to reaching agreement on a bill, but in the closing days of the session, Democrats unveiled a provision that would have pushed future pension costs to schools outside of Chicago. The city already covers most of its pension costs. Republicans vehemently opposed the idea, saying it would increase local property taxes, and as a result, pension talks broke down, as did hopes for a bipartisan budget plan. Democrats eventually agreed to tackle the cost shift as a separate issue to break the stalemate.
This year it was Democratic legislative leaders who did not see eye to eye. Speaker Michael Madigan and Senate President John Cullerton each have their own proposed legislation. And in the last days of the session, neither was willing to back down off his preferred plan. Supporters of Cullerton’s proposal say that model, which offers employees a choice in their benefits reduction, is constitutional. They argue that Madigan’s plan, which would unilaterally cut benefits, is not. Backers of Madigan’s SB 1 say Cullerton’s plan would not save enough to stabilize the pension systems, which have an estimated $100 billion unfunded liability. Madigan’s legislation passed in the House but failed in the Senate. Cullerton’s bill, which is backed by public employee unions and teachers' unions, was approved in the Senate but was not called for a House vote.
Union leaders today called on Madigan to bring Cullerton’s SB 2404 up for a vote. “Today's downgrade was totally avoidable. Before it adjourned, the House could have passed Senate Bill 2404 — a fair, constitutional, comprehensive pension funding solution,” said a statement from the We Are One Coalition of unions. “The House must now finish its work and pass SB 2404 as soon as it reconvenes. House members and Illinois citizens have been demanding a vote for weeks — the time is now.” However, Quinn supports Madigan’s SB 1.
Some are using the downgrade to argue that Quinn should call a special session on pensions. However, the last time the governor tried that tactic, nothing was accomplished. If lawmakers want to pass something that can go into effect in the next year, they will need the support of three-fifths of both chambers. Otherwise they will have to wait until Jan. 1, when the legislative clock resets and pension reform could pass with a standard majority.
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