SPRINGFIELD — A leading Wall Street bond house Thursday issued a negative outlook toward the state government’s finances because of concerns over the billions of dollars owed to Illinois’ public pension systems.
The move by Fitch Ratings represents a jolt to Gov. Blagojevich as he tries to mold a 2007 state budget and fend off Republican Treasurer Judy Baar Topinka, who has made the state’s precarious financial condition a cornerstone of her bid to unseat him this fall.
The state faces a $39 billion funding shortfall in its pension funds and, under a 1995 law, is committed to an ever-increasing schedule of payments that threatens to hamstring the next administration.
This year, $1.6 billion was diverted by the state to its pensions. In the 2008 budget year, the total that must be spent rises to $2.75 billion. And by 2010, the final year of the next governor’s term, the state’s annual pension commitment will reach $3.8 billion.
“Fitch believes that, barring a significant revenue increase or a substantial reduction in expenditures, Illinois will be unable to follow its own plan to contain the $39 billion unfunded pension liability,” the firm wrote in a report issued Thursday.
“This intractable problem, including cash flow pressures, is apt to impair credit quality despite the breadth and wealth of the state’s large economy,” Fitch concluded, listing Illinois as one of only three states with such negative outlooks
This doesn’t have immediate consequences, but if it isn’t dealt with properly, there will be a dramatic increase for the state to borrow money.
It’s fair to say that everyone punted except Hynes on the problem of underfunding pensions before Blagojevich, but making it worse doesn’t leave the administration somehow clean. Continuing an unsustainable policy is not an excuse.
Via the 13th Floor at Governing
Don’t read too much into the “event” of the smallest ratings agency issuing a “negative outlook”. That’s comparable to the Fed saying — “we’re not raising interest rates, but we think the balance of the evidence makes raising interest rates more likely down the road than lowering them.”
The issues aren’t new — each of the ratings agencies is waiting until after the election to see what revenue sources will be politically feasible (From tollway leasing to service sales tax or a property tax swap).
For those who don’t follow the ratings agencies, Fitch is the smallest and as such tries to be a little edgier. Don’t get me wrong — I’d prefer that the Guv have cut the unfunded pension problem from $43 to 23B, not just $35B — but this ratings _outlook_ change isn’t huge news and the price of IL’s pension problems are already built into our bond prices (what, you think major institutional bond buyers don’t pay attention to these things?).
Sage Observer,
Why did Fitch, since they’re an edgier firm, only give negative outlooks to 3 states? Was it selective edginess?
BTW, in FY 2004, the administration swapped $10 billion in GO Bonds and put it into the pension funds – that’s why the pension underfunding dropped. Of course now there’s $10 billion in GO bonded debt not related to pensions, but it’s a state obligation nevertheless.
The more apt analogy for the rating agencies is that of a bank assessing a person’s credit worthiness. If you’ve got a big ballon mortgage payment pending and no reliable source of payment, the bank is probably going to charge that person a higher interest rate to refinance unless the person can drop some expenses or get a bigger paying job.
Actually, the negative outlook is a pretty big deal that most media will probably downplay. It’s the opposite of an endorsement of the governor’s fiscal policies, and may affect the cost of debt service by maybe $25 million annually.