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MOODY’S
DOWNGRADES ILLINOIS TO 1 NOTCH ABOVE JUNK, WARNS STATE PENSION
LIABILITIES TOP $250B
Illinois Policy Institute/Ted
Dabrowski
Vice President of Policy
Moody’s Investors Service cited Illinois
lawmakers’ $250 billion in pension debt and the lengthy budget impasse
as reasons for its one-notch credit downgrade. Over the years, Illinois’
state credit rating has been downgraded multiple times due to massive
spending and excessive borrowing.
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 The credit rating agency Moody’s Investors Service has downgraded the state of
Illinois’ credit rating to Baa3, just one notch above a noninvestment-grade, or
“junk,” rating. Moody’s has also placed the state rating on “negative” watch,
meaning the agency could downgrade Illinois again in the near future.
This downgrade came June 1, the day after the Illinois General Assembly’s spring
legislative session ended. The rating agency acted because the General Assembly
failed to pass a budget for fiscal year 2018, which begins July 1. S&P Global
Ratings also downgraded the state on June 1.
The passage of a budget prior to July 1 is now more difficult, as any budget
vote requires a three-fifths majority rather than the simple majority required
during regular session.
Moody’s issued a warning about the growth in the state’s massive pension debt.
According to Moody’s calculations, Illinois owes over $250 billion in pension
debt, far higher than the $130 billion the state says it owes. The agency
stated:
“The downgrade to Baa3 for Illinois’ GO bonds is consistent with the state’s
intensifying pressure from pension liabilities; by our calculation, the state’s
unfunded pension liability (Moody’s adjusted net pension liability, or ANPL) for
its five major plans in aggregate grew 25% in the year ended June 30, 2016, to
$251 billion.”
Moody’s ended its report by criticizing Illinois’ record of poor governance over
the past decade: “During the past decade, the state’s governance framework has
allowed practices that greatly offset [the state’s] strengths.”
In other words, lawmakers’ habit of constantly kicking the can down the road and
their failure to enact reforms are what caused the current crisis.
Illinois’ fiscal crisis started years before the current impasse
Moody’s is right. The state’s fiscal collapse is the culmination of decades of
budget gimmicks used to paper over Illinois’ structural spending problems and
misplaced spending priorities that favor special interests over ordinary
residents.
State politicians have resorted to all sorts of schemes, from pension ramps to
issuing pension obligation bonds to temporary tax hikes, to help “balance” the
budget without reforming the underlying skyrocketing costs. These ploys have
enabled politicians from both parties to preserve the status quo and to spend
more on their misplaced priorities, such as high compensation and retirement
benefits for government workers.
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The budgets under former Gov. Pat Quinn, for example, appeared
balanced due to billions in borrowing, taxing and other budgetary
maneuvers. Those maneuvers allowed lawmakers to avoid fixes to
spending drivers such as pensions, government worker health care and
local government subsidies.
The credit rating agencies’ own downgrade history bears that out.
Illinois’ out-of-control spending spurred credit downgrades almost a
decade ago
Illinois has suffered 21 downgrades from the three major ratings
agencies since 2009.
The downgrades began when Illinois started borrowing to conceal its
growing pension crisis. As governor, Quinn borrowed a total of more
than $7 billion in two years to make the state’s pension
contributions.
By 2010, Moody’s had already downgraded Illinois’ credit to the
worst rating in the nation.
The next five downgrades happened in the midst of the state’s record
tax hike. The tax hikes that brought in $32 billion in new revenues
failed to quell the rating agencies’ concerns about Illinois’
finances.
And since then, in the absence of major economic reforms, eight
more downgradeshave followed.
The latest round of dysfunction brings the state to just one notch
above junk.
Reform, not gimmicks
The common theme in Illinois’ budget and ratings history is
that the state has refused to pass real spending and economic
reforms.
In place of reform, politicians have used budgetary gimmicks, debt
and more taxes to put off addressing Illinois’ mounting problems.
Illinois can’t afford to put off structural reforms any longer.
Illinoisans need comprehensive
reforms that balance
the budget without tax hikes.
The state can’t leave real fixes for later – that will only mean a
deepening fiscal crisis, higher
taxes and more
downgrades.
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