(June 4, 2013) — Not content with having one of the worst public pension systems in the US, Illinois has the lowest credit rating-and it just got worse.
Last night, ratings agency Fitch downgraded the state of Illinois from “A” to a “A-“, with a negative outlook, following the last-minute debacle to try and solve its estimated $187 billion pension hole.
The state already languished in at the bottom of the US states in terms of its credit worthiness – yesterday’s announcement just secured its unfavourable position.
“FAILURE TO TAKE ACTION ON PENSIONS: The downgrade reflects the on-going inability of the state to address its large and growing unfunded pension liability, most recently through the failure to pass pension reform during the regular legislative session that ended May 31, 2013,” the agency said in its report.
“Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable, and that failure to achieve reform measures despite the substantial focus on this topic exacerbates concern about management’s willingness and ability to address the state’s numerous fiscal challenges.”
Specifically, the agency criticised the latest attempts by politicians to sort out the mess by tabling competing bids to solve the problem.
“INABILITY TO REACH AGREEMENT ON PENSION REFORM: The legislature grappled with various pension reform proposals throughout the most recent legislative session and, despite competing legislation passing in both the house and senate, was not able to come to agreement on a final form of pension reform…. In evaluating the credit impact of any reform, Fitch’s focus would be whether the changes enhance the funding levels of the pension systems and control the impact of pension payments on the budget.”
Fitch said although temporary corporate and personal tax hikes would help in the short term the outlook for the state’s finances needed to be sorted out quickly.
“Long-term solutions remained elusive,” the agency said, citing not just pension problems, but “also to maintaining budgetary balance in light of the temporary nature of the tax increases and the large accounts payable backlog.”
A lower credit rating is likely to push up borrowing costs for the cash-strapped state.
Already the agency said it had downgraded debt that was supported by the state and funded a multi-million dollar sports centre.
Earlier this year, Illinois settled with the Securities and Exchange Commission over claims the state had not fully informed investors about true nature of its pension liabilities.
Fellow ratings agency Moody’s told states in March that they would be examining their pension liabilities increasingly closely when making a judgement on their credit-worthiness.
This may not be the last we hear about Illinois on the matter.
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