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.

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