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.”
Showing posts with label credit rating. Show all posts
Showing posts with label credit rating. Show all posts
Friday, January 25, 2013
Friday, December 14, 2012
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.”
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.”
Wednesday, August 29, 2012
Quinn: Credit downgrade bolsters calls for pension reform
By Jamey Dunn
The rating agency Standard & Poor’s reduced Illinois’ credit rating today, citing the state’s underfunded pension systems and continued budget worries.
The agency moved Illinois from an “A+” to an “A” rating. The rating agency also gave the state a “negative” outlook for the future. “The downgrade reflects the state's weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” Standard & Poor's credit analyst Robin Prunty said in a prepared statement. “The downgrade also reflects continued financial weakness despite significant measures in the past two years to improve structural budget performance.”
S&P said that the negative outlook was based upon the potential for growth in the state’s unfunded pension liability, which stands at $83 billion. The agency also noted that the 2015 phaseout of the recent income tax increase could weaken the state's fiscal standing. Illinois now has the second lowest bond rating from S&P in the country. The state with the lowest, California, received a “positive” outlook from the agency.
A lower bond rating can lead to a higher interest rate for Illinois when it looks to borrow, something it does regularly to fund capital projects. Higher rates means borrowing will cost more.
However, Moody’s rating agency in January gave Illinois its lowest credit rating of any state, and on a bond sale later that same month, the state got the best interest rates it had seen since the 1970s. Quinn brushed off the downgrade when questioned by reporters at the time, pointing to steady ratings from S&P and Fitch Ratings. “Positive feedback like we have seen today from investors demonstrates the strong confidence investors have in Illinois,” David Vaught, then-director of the Governor’s Office of Management and Budget, said in a written statement released by Quinn's budget office to tout the January bond sale. “These bond bids make clear that investors know we are taking steps to correct the decades of fiscal mismanagement in our state, and they understand we continue to take major steps to reform pensions and control skyrocketing Medicaid costs in an effort to return Illinois to sound financial footing.”
In recent months, Quinn has used the possibility of further downgrades as a call to action for lawmakers who have yet to produce a pension overhaul that has the needed backing to pass in both chambers. “Today’s action is no surprise. Over and over again this summer, I made clear that if we do not act on pension reform, the state of Illinois would suffer the consequences. Now it has. Eliminating our $83 billion unfunded pension liability is vital to getting our financial house in order. Today’s action by Standard & Poor’s is more evidence that we must act,” the governor said in a prepared statement.
After a recent special legislative session that Quinn called to address pension reform produced nothing of substance, negotiations appeared to be at a standstill. Quinn said today that he plans to invite the four legislative leaders to a meeting to discuss pensions in September.
The rating agency Standard & Poor’s reduced Illinois’ credit rating today, citing the state’s underfunded pension systems and continued budget worries.
The agency moved Illinois from an “A+” to an “A” rating. The rating agency also gave the state a “negative” outlook for the future. “The downgrade reflects the state's weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” Standard & Poor's credit analyst Robin Prunty said in a prepared statement. “The downgrade also reflects continued financial weakness despite significant measures in the past two years to improve structural budget performance.”
S&P said that the negative outlook was based upon the potential for growth in the state’s unfunded pension liability, which stands at $83 billion. The agency also noted that the 2015 phaseout of the recent income tax increase could weaken the state's fiscal standing. Illinois now has the second lowest bond rating from S&P in the country. The state with the lowest, California, received a “positive” outlook from the agency.
A lower bond rating can lead to a higher interest rate for Illinois when it looks to borrow, something it does regularly to fund capital projects. Higher rates means borrowing will cost more.
However, Moody’s rating agency in January gave Illinois its lowest credit rating of any state, and on a bond sale later that same month, the state got the best interest rates it had seen since the 1970s. Quinn brushed off the downgrade when questioned by reporters at the time, pointing to steady ratings from S&P and Fitch Ratings. “Positive feedback like we have seen today from investors demonstrates the strong confidence investors have in Illinois,” David Vaught, then-director of the Governor’s Office of Management and Budget, said in a written statement released by Quinn's budget office to tout the January bond sale. “These bond bids make clear that investors know we are taking steps to correct the decades of fiscal mismanagement in our state, and they understand we continue to take major steps to reform pensions and control skyrocketing Medicaid costs in an effort to return Illinois to sound financial footing.”
In recent months, Quinn has used the possibility of further downgrades as a call to action for lawmakers who have yet to produce a pension overhaul that has the needed backing to pass in both chambers. “Today’s action is no surprise. Over and over again this summer, I made clear that if we do not act on pension reform, the state of Illinois would suffer the consequences. Now it has. Eliminating our $83 billion unfunded pension liability is vital to getting our financial house in order. Today’s action by Standard & Poor’s is more evidence that we must act,” the governor said in a prepared statement.
After a recent special legislative session that Quinn called to address pension reform produced nothing of substance, negotiations appeared to be at a standstill. Quinn said today that he plans to invite the four legislative leaders to a meeting to discuss pensions in September.
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