 Standard & Poor’s Global Ratings, or S&P, downgraded Illinois’ debt closer to
junk-rating territory Sept. 30. The state’s credit rating fell to BBB from BBB+
and was assigned a negative outlook by S&P, meaning the ratings firm could
downgrade the state again in the near future.
The reasons for the downgrade serve as yet another indictment of Illinois’
refusal to enact reforms. The ratings agency blamed the state’s history of
deficits, failure to curb spending and its growing pension costs as reasons for
its downgrade.
S&P’s Illinois downgrade comes on the heels of Moody’s downgrade of Chicago
Public Schools. Moody’s similarly blamed the district’s long-term irresponsible
deficits, growing pension costs and a lack of reforms for its own ratings
action.
Illinois’ long history of unbalanced budgets
S&P criticized the state’s “long history of structural imbalance” as a primary
reason for its downgrade.
Not only has Illinois run a sizable unpaid bill backlog since 2005, but Illinois
hasn’t had a fully balanced budget since 2001.
Politicians have ignored deficits, unpaid bills and credit downgrades for years.
illinois hasn't had a balanced budget since 2001
Those problems are why Illinois suffered budget deficits even during the
mid-2000’s boom period and during the 2010-2014 income tax hike, which injected
an additional $32 billion into Illinois’ coffers.
Despite those revenues, Illinois politicians have always managed to spend beyond
the state’s means by engaging in poor financial mismanagement and misplaced
priorities.
Over the decades, Illinois has always collected more than enough revenue to pay
for its essential expenditures, as shown in the Institute’s recent report on the
state’s history of revenues and spending.
Illinois’ inability to enact spending reforms
S&P also criticized Illinois’ inability to “curb its spending” due to the lack
of a full budget for the second consecutive year.
The state is on track to spend $39.6 billion in 2017 due to the stopgap budget.
That spending is $4 billion, or 11 percent, more compared to 2015, the last year
Illinois had a full budget.
More importantly, the state’s increased spending – due to consent decrees, court
orders and continuing appropriations – has resulted in a $5.4 billion deficit
for 2017.
S&P warned that unless Illinois responsibly addresses its ongoing fiscal
imbalance, more downgrades, higher borrowing costs and even bigger burdens on
Illinois’ taxpayers are on their way.
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 Illinois’ growing pension crisis
S&P also cited, as a reason for the downgrade, Illinois’ “large net
pension liability” that threatens to grow even larger.
In all, the state’s $111 billion pension crisis already consumes 25
percent of Illinois’ general fund budget. That’s crowded out state
spending on social programs, higher education and nearly every other
core government service.illinois pension crisis
And the pension burden on Illinois’ budget is likely to only grow
bigger.
S&P notes that the pension funds’ recent lowering of how much they
assume their investments will earn in the market, along with poor
investment returns, will likely drive up Illinois’ required annual
pension contributions by hundreds of millions of dollars.
In fact, without reforms, it’s guaranteed pensions’ burden on
taxpayers will grow larger. Taxpayers will have to pay more to
pensions as long as Illinois’ promised pension benefits to state
workers keep growing.
Promised pension benefits have increased at a nearly 9 percent pace
annually for the past three decades, growing to $191 billion in 2015
from just $18 billion in 1987.
That growth rate far surpasses the growth rates of state revenues,
inflation, household incomes and taxpayers’ ability to pay for those
benefits during that same period.
S&P’s suggestion: real reforms
According to S&P, Illinois will only fix its budget crisis when it
passes “significant measures to achieve structural balance and
contain fixed cost growth.” That means the state has to reform how
it operates and find ways to reduce the costs driving Illinois’
record spending.
Lawmakers can start by moving new state workers to 401(k)-style
plans and giving existing workers an optional 401(k)-style plan.
That will start to eliminate the costs of the state’s broken pension
systems
Illinois can also fix its broken workers’ compensation system and
freeze local property taxes, all while giving local governments more
control over their collective bargaining agreements.
These kinds of reforms will set Illinois on a fiscally sustainable
path and help make government work for taxpayers.
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