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* Fitch Ratings…
Recent pension proposals from Illinois’ new governor are an important first step in addressing the state’s significant fiscal challenges, according to Fitch Ratings. But whether or not they are implemented, Fitch anticipates Illinois’ long-term liability burden will remain elevated and amongst the highest for U.S. states for the foreseeable future. Fitch also anticipates annual employee retirement costs will continue to pressure the state’s expenditure flexibility. Fitch’s focus in the near term, reflecting the key rating sensitivity in resolving our Negative Outlook, remains Illinois’ ability to achieve progress in addressing its immediate structural budgetary challenges. The pension proposals offer a mix of potential revenue increases, cash and asset infusions, indirect benefit changes and an actuarial adjustment, to address the liability and budgetary demands of the states’ pension systems. Several elements will take months or even years before full implementation. […]
The pension plan outlined by Illinois’ Deputy Governor for Budget and Economy includes five closely related proposals. The first is to dedicate $200 million of new revenue from a proposed graduated income tax as an annual supplemental pension contribution. While this would be in addition to the statutory pension requirement, Fitch notes this statutory requirement only targets 90% funding of pension liabilities. In fiscal 2018, the gap between the state’s 90% statutory funding requirement and the actuarially determined contribution was over $1 billion dollars, more than five times the amount of the proposed supplementary funding. The graduated income tax requires a state constitutional amendment that must be approved by legislative super-majorities (which Democrats have in both chambers) and then by voters, also by a super-majority. Fitch estimates the earliest it could be approved would be in the November 2020 general election.
A second proposal to repurpose or sell state-owned assets to support the pension systems is also uncertain. The administration recently created a taskforce to evaluate state assets for this purpose but has not yet indicated a specific target amount or a timeline. Fitch cautions that financial engineering transactions that use a government-owned asset to strengthen a pension plan’s funded condition and slow the burden of rising contributions are not a substitute for more fundamental reforms that correct an underlying sustainability problem.
The third proposal is for issuance of $2 billion in pension obligation bonds (POBs) to reduce the pension liability rather than as budgetary relief for annual contributions - this reflects about 1% of the most recent estimate of the Illinois’ Fitch-adjusted net pension liabilities of more than $162 billion. Fitch generally considers POBs a neutral to negative credit factor. If POB proceeds are deposited with a pension trust, while full actuarial contributions continue to flow uninterrupted from annual budgetary resources, the issuance of POBs offsets the unfunded liability and has little immediate effect on the issuer’s overall long-term liability burden. In announcing the plan, the Deputy Governor said the state would only pursue the bonds if interest rates are lower than the discount rate on pension obligations at the time of issuance. Fitch notes that the POBs could be multi-decade obligations and present inherent investment and timing risks.
Fourth, the administration proposes extending the buyout programs enacted with the state’s current year budget, perhaps permanently. Several of the buyout programs have accepted applications but no payouts have been made to date. Fitch previously indicated uncertainty in the savings budgeted in fiscal 2019 from these buyouts. Extending them indefinitely could add to current year budget pressure by eliminating the incentive for eligible pension system members to sign up for a buyout this year, thereby reducing the immediate savings to the state. Over the long-term, Fitch considers the proposed open-ended buyouts as indirect pension benefit changes that could gradually reduce the long-term pension liability, but would require an ongoing funding source. Illinois’ fiscal 2019 budget anticipated issuance of up to $1 billion in GO bonds to fund pension buyouts. Absent a constitutional amendment, Illinois’ ability to more directly reduce already-accrued retiree benefits appears sharply limited.
The fifth proposal is arguably the clearest and most achievable change, but one that comes with considerable risk. To reduce the annual budgetary burden, the governor proposes extending the current closed 26-year amortization by seven years to 2052, while maintaining the comparatively weak 90% funding target. Re-amortization has been used by other state and local governments when addressing pension challenges, but is typically in the context of a commitment to achieving full prefunding, making actuarially determined contributions, and sometimes, benefit changes for current or future employees and retirees. Illinois’ re-amortization would maintain an inadequate funding target and be combined with uncertain revenue commitments, and limited indirect benefit changes.
The pension proposals in aggregate attempt to reduce immediate budgetary demands and longterm net pension liabilities, but on their own are unlikely to affect Fitch’s rating trajectory for Illinois’ IDR in the near term. Resolution of our Negative Outlook hinges on the state’s ability to address structural budgetary issues in the current year and fiscal 2020, and demonstrate progress toward more sustainable fiscal management. Fitch has previously identified more than $2 billion in risks and one-time items in Illinois’ nearly $40 billion fiscal 2019 general funds budget. The administration recently estimated the structural deficit for fiscal 2020 at $3.2 billion. The governor’s pension plan and his upcoming executive budget proposal will begin the process of determining how Illinois will meet these pressing fiscal challenges. [Emphasis added.]
Discuss.
posted by Rich Miller
Wednesday, Feb 20, 19 @ 9:28 am
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Let us begin by remembering Fitch and the other Wall Street hustlers brought us the ‘08 world wide depression with their “good as gold” rating of all those junk housing bonds…beware of any opinion from this crew
Comment by Annonin' Wednesday, Feb 20, 19 @ 9:44 am
Wow…Just WOW…!!! This smacks of Ken Lay School of Accounting Principals.
Comment by Meelos Wednesday, Feb 20, 19 @ 9:48 am
a group of men locked away in illinois prisons have provided a way to protect public safety and substantially reduce DOC expenditure. this is HB 3214 sponsored by rep rita mayfield. this bill was writtnen by stateville debate team. take a look
Comment by bill Wednesday, Feb 20, 19 @ 10:04 am
—while maintaining the comparatively weak 90% funding target—-
90% funding target is weak? I’m no expert but seems quite reasonable to me.
Comment by sonny chiss Wednesday, Feb 20, 19 @ 10:05 am
==90% funding target is weak?==
Read the next sentence.
Comment by City Zen Wednesday, Feb 20, 19 @ 10:07 am
It’s a mixed bag, but like Fitch, I’m keeping an open mind. Pritzker is committed to paying the debt. For me, that’s the main takeaway. Nobody should expect there to be an easy way to repay $130 billion, and this plan is only part of the solution.
But it’s a realistic plan that can be passed and withstand a legal challenge. That counts as progress.
Comment by 47th Ward Wednesday, Feb 20, 19 @ 10:21 am
Why is the governor proposing additional spending when we can’t pay for our current spending?
Comment by Anonymous Wednesday, Feb 20, 19 @ 10:38 am
The only thing that should be heard from Fitch is gratitude that everyone associated with it made it through 08/09 without ending up in a prison jumpsuit.
Comment by Anon Wednesday, Feb 20, 19 @ 10:39 am
Today’s WSJ- 7 worst states in terms of finance and infrastructure are all Dem. 7 best states are Repub. not a coincidence
Comment by Sue Wednesday, Feb 20, 19 @ 10:44 am
“90% funding target is weak? I’m no expert but seems quite reasonable to me”
The best is the enemy of the good and all that. More money is always better, but is it *needed*.
Comment by Perrid Wednesday, Feb 20, 19 @ 10:55 am
“Today’s WSJ- 7 worst states in terms of finance and infrastructure are all Dem. 7 best states are Repub. not a coincidence”
Illinois just flipped from being a Republican governor state to a Democratic governor state. Since I don’t subscribe to WSJ which list are we on?
Comment by Anonymous Wednesday, Feb 20, 19 @ 10:56 am
Like others, I have a problem with Fitch criticising the 90% target. That is clearly more than adequate for s government entity that can’t go bankrupt and has the theoretical capacity to raise unlimited revenue, constrained only by political considerations.
Comment by RNUG Wednesday, Feb 20, 19 @ 10:57 am
Adding … nice to see Fitch confirm my $1B needed from new revenues estimate for the pensions
Comment by RNUG Wednesday, Feb 20, 19 @ 11:00 am
=Sue=
You missed this part:
“High-tax Democratic states spend from 50% to nearly 100% above the national average per student in public schools. That’s paid off in quality, according to a study by the financial website 24/7 Wall St., whose list of top public schools by state includes Massachusetts, New Jersey and New York.”
Comment by supplied_demand Wednesday, Feb 20, 19 @ 11:04 am
Gov. ‘Kick the Can’ is no better than the past guy it appears.
Comment by Blue Dog Dem Wednesday, Feb 20, 19 @ 11:31 am
Nice term paper, Fitch.
But on a scale of 0 to 100, what is the percentage likelihood that payments on Illinois GO bonds would not be made on time and in full any time in the next five years, based on statute, debt service coverage and past experience?
I mean, isn’t that what you guys supposedly do?
Comment by wordslinger Wednesday, Feb 20, 19 @ 11:38 am
Sue
What a lazy hyperpartisan statement. Only the simple minded make those sorts of arguments.
Comment by Demoralized Wednesday, Feb 20, 19 @ 12:10 pm
==I have a problem with Fitch criticising the 90% target. That is clearly more than adequate for s government entity that can’t go bankrupt==
Except that the funding target has absolutely nothing to do with the fiscal solvency of the entity. It is a product of the rate assumptions used by the pension plan.
Comment by City Zen Wednesday, Feb 20, 19 @ 1:54 pm
CZ, given your objections to using the funding ratio as a measure of fiscal health, don’t you agree that Fitch is overwrought in calling a 90% ratio “weak”? Especially for a government that cannot go bankrupt?
Comment by Jibba Wednesday, Feb 20, 19 @ 4:05 pm
Demoralized- it’s not my argument- it’s the editors at the WSJ
Comment by Sue Wednesday, Feb 20, 19 @ 4:50 pm
@ Sue
Then the editors at the WSJ published a simple-minded article, and you’re parroting its simple-minded talking points. I fail to see how that negates @Demoralized’s point.
Comment by Chicago_Downstater Wednesday, Feb 20, 19 @ 5:02 pm
Jeesh, Sue, I must have missed when IL was on such solid economic ground under Ryan and Rauner.
Comment by Anonymous Thursday, Feb 21, 19 @ 8:11 am