To Avoid Junk Bond Status, Illinois Treasurer Gives Gov. Rauner Ultimatum

To prevent Illinois from becoming the first state in US history issued junk bond status, State Treasurer and state CIO Michael Frerichs Monday gave Gov. Bruce Rauner an ultimatum in the form of a five-step plan.

This move comes after the approval of a budget package and a move by Moody’s Investors Service to place the state’s general obligation rating under review for possible downgrade.

“The credit-rating agencies have indicated that the new revenue and spending cuts alone are not enough to insulate the state against further credit downgrades, including junk bond status,” Frerichs said in the statement. “I understand that Gov. Rauner disagrees with the elected members of the House and Senate. However, should he not take these necessary steps, he is inviting the credit-rating agencies to plunge Illinois into junk bond status, the results of which will lead to higher property taxes.”

To avoid the state moving into junk bond status, Rauner must undertake the following, Frerichs said:

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Travel to New York, speak directly with the three ratings agencies, and convince them that he embraces the decision of the Legislature and will implement the budget package.

Immediately take visible, responsible steps to implement the $6 billion in bonding authority, which will yield $3 billion in additional federal dollars to pay down the $15 billion bill backlog.

Sign a funding model that ensures that local schools open on time.

Clearly and proactively communicate the new tax rates with Illinois employers to ensure that revenue estimates and cash-flow expectations are met.

Eliminate the “divisive rhetoric” that is impairing the state from moving forward. This divisiveness “counters the civility and bi-partisanship the rating agencies wish to see,” Frerichs said.

“The low rating from the rating agencies is reflective of the fact that Madigan’s 32% permanent tax increase will not solve the problems created by decades of unbalanced budgets, unfunded pension liabilities, borrowing, and high debt. Even with the tax increase, this budget remains $2 billion out of balance for fiscal year 2018,” Eleni Demertzis, a Rauner spokeswoman told CIO. “The best thing we can do is to work collaboratively to pass truly balanced budgets that pay down our debt, reform our pension system, and make the changes necessary to drive economic growth in our state. The Governor will continue to be a champion for the critical changes needed to get Illinois on a path to fiscal solvency.”

Earlier this year, Frerichs initially warned of credit downgrades and impending junk bond status for the state due to the inability to reach a budget agreement. If junk bond status is reached, the financial markets will become exasperated because some investors—including Illinois debt-purchasing entities with iron-clad constitutional guarantees—are restricted from doing business with junk bond-labeled entities.

Junk bond status will also terminate the state’s use of toxic credit-swap agreements, which will result in termination penalties of up to $107 million, as well as interest rate penalties which could be demanded by the lending agencies.

Illinois recently approved its first budget package in two years—a s$36.1 billion plan for thecurrent fiscal year, beginning July 1. The package reduces the state’s annual budget $3 billion, from last year’s annual spend of $39 billion. Up to $ billion of the bill backlog could be addressed if the cuts are combined with new revenue and federal matching dollars.

Rauner has criticized the package, blaming the legislation for many of the issues the state currently faces in an op-ed piece he wrote for Crain’s Chicago Business. “The budget package ignoredeverything we need and want: property tax relief for families and businesses, regulatory relief to grow our economy, and term limits on politicians to restore confidence in our political system. This budget ultimately will require even more tax increases to balance future budgets and pay down our debt,” he wrote. “This is not the future that we imagined for Illinois. This is not who we are. We are not people who see problems and do nothing. We are not people who turn away from each other.”

Since Rauner took office in January, Illinois has suffered eight credit downgrades. Each downgrade involved the state’s bill backlog—now estimated to be $15 billion—the budget impasse, and other additional factors.

“This mix of revenue and cuts is far from perfect. It is, however, now the law and, if implemented, it is a critical first step to addressing Illinois’ deep, structural challenges,” Frerichs said. “It is clear that we will not begin to climb out of this debt if the Governor does not take the necessary steps to lead us away from the abyss.”

Tags: Budget Package, Governor Rauner, Illinois, Junk Bonds

In an attempt to prevent, or at least delay, defaulting on retiree payments, Taiwan has enacted deep cuts to pensions for public school teachers, civil servants, and political appointees.

“Now that these laws have been passed, pension system bankruptcy is no longer an urgent crisis in Taiwan,” Taiwan President Tsai Ing-wen said in a statement.

According to Taiwan government data, pensions for civil servants would have defaulted by 2030, while pensions for teachers would default the following year, if no changes were made to the current pensions system.

“It is estimated that these actions will save the public coffers NT$1.4 trillion ($45.8 billion),” said Tsai. “We will take the money saved and inject it into the Public Service Pension Fund to ensure that it will remain viable for at least 30 years.”

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The cuts include the phasing out of an 18% preferential interest rate public school teachers receive on their savings accounts. Under the new regulation, the 18% interest rate on savings for teachers who receive NT$32,160 ($1,074) per month or more in retirement income will be reduced to 9% from July 1, 2018, to Dec. 31, 2020. It will then be cut to zero starting Jan. 1, 2021.

For retirees who opted for a lump-sum retirement payment rather than a monthly pension, the preferential interest rate will decrease to 6% over a six-year period.

Tsai said all pension systems need to be continually adjusted to stay in synch with the times. “In carrying out the pension reform, we established a mechanism for regular reviews,” she said. “Now that we’ve had this successful experience, when it next comes time for a review of the pension system, we will have more confidence.”

The bill also lowers the income replacement rate for pensioners who are receiving NT$32,160 per month or more. Those with 35 years of service will have their income replacement rate drop to 60% from 75% of their pre-retirement income over a 10-year period. Those with 15 years of service will see a decrease to 30% from 45% over the same period of time.

Additionally, teachers’ monthly pensions, which are currently based on their salary during their last month of service before retiring, will instead be based on their average monthly salary in their final five years of employment. That will then be adjusted during a period of 10 years to their average monthly salary over the final 15 years of service.

“This round of pension reform has an important significance, for we’ve proven that pension reform is neither a political minefield, nor a taboo issue that absolutely cannot be broached,” said Tsai. “And no one will become destitute because of the pension reform passed.”

Tags: Pension, Taiwan, Teachers