Illinois pension liability

Rauner’s State of State Address Short on Pension Talk

On Wednesday, new Illinois Gov. Bruce Rauner gave his State of the State address.

The speech wasn’t short on policy ideas – but in one area, Rauner was conspicuously mum: Pensions.

Rauner didn’t so much as say the words “pension” or “retirement” in his speech. Observers say he could be saving that talk for his budget address later this month.

More from the Chicago Tribune, including reaction from credit rating agencies:

For rating agency analysts, who routinely check the state’s pulse for signs of improving health, the assessment was simple: “Show me.”

[…]

On Wednesday, Rauner provided little detail about how he’d tackle Illinois’ largest financial troubles.

The past is littered with proposals to “right the ship, but they didn’t get there,” said Karen Krop, an analyst for Fitch. “We’re looking for an effective balanced budget and a pension solution.”

She said she will be watching closely for the governor’s coming budget proposal — a document that will provide more detail than the agenda Rauner outlined this week. The key, Krop said, would be permanent solutions to the state’s financial problems.

The state’s rating, its financial grade, has been “downgraded multiple times over the last five years because of its inability to find permanent solutions,” Krop said. There’s a “mismatch between spending and revenue,” and while temporary tax increases helped since 2011, they aren’t lasting.

“A lot has to do with the pension liability,” Moody’s analyst Ted Hampton said. “The state is still a long way off from coming to terms with its pension liabilities.”

A potential pension solution remains tied up in courts and is a major reason why rating agencies such as Moody’s have graded Illinois as the most unhealthy of states financially.

[…]

“Illinois’ long-term liabilities, particularly pension liabilities, are very high for a U.S. state and are expected to remain so even with improvement in pension funding from pension reform,” Krop said.

Read the full speech here.

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Bruce Rauner Named Most Important Player in U.S. Pensions

Institutional Investor magazine has released its list of the 40 most influential people in U.S. pensions. Topping the list is the man who now governs a state with one of the worst pension problems in the country: Bruce Rauner.

From Institutional Investor:

Republican Bruce Rauner, the victor over Democratic incumbent Pat Quinn in the recent Illinois gubernatorial race, may regret he ever wished to win elective office. Rauner, onetime chairman of Chicago private equity firm GTCR, has had no real profile on retirement policy but finds himself staring at what may be the most serious pension mess among the states.

As of June 30, 2014, Illinois’s pension debt had reached $111 billion; Moody’s Investors Service reported in September that the state’s three-year average pension liability over revenue was 258 percent, five times the median percentage for all 50 states.

In 2013, Quinn persuaded the legislature to pass a bill raising the retirement age and cutting cost-of-living increases for beneficiaries. But the Illinois constitution holds that pensions cannot be “diminished,” and a coalition of public employee unions sued. And on November 21, Sangamon County Circuit Judge John Belz found the law unconstitutional, declaring, “Protection against the diminishment or impairment of pension benefits is absolute and without exception.”

Depending on various appeals, Rauner, 57, could try to implement his campaign agenda for pensions, which includes capping the current program and shifting members to a defined contribution plan — though he has begun to talk of just shifting new employees to avoid legal problems. Rauner has said he’d seek to keep benefits from rising faster than inflation and would eliminate employees’ ability to receive large pay hikes before retirement to beef up their pensions.

The odds of pushing these reforms through a Democratic-controlled state senate remain long, made worse by allegations that Rauner (and separately, Chicago mayor Rahm Emanuel [No. 4]) accepted contributions from executives affiliated with firms that manage Illinois pension plans. Rauner has not publicly responded to the allegations.

The ranking clearly reflects not what Rauner has already done, but the power he will have in the coming years. If the Illinois Supreme Court strikes down the state’s pension reform law, lawmakers will have to start from scratch – and Rauner will be at the helm.

Photo By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

How Credit Rating Agencies Reacted to Illinois Pension Ruling

None of the three major rating agencies changed their outlook on Illinois’ credit in the wake of a lower court ruling that deemed the state’s pension reform law unconstitutional.

But rating agencies are certainly keeping a close watch on the state as the reform law moves up to the Supreme Court. And all three agencies had something to say after the ruling.

Moody’s had the harshest take, calling the ruling “credit negative” that leaves the door open for a rating downgrade. Summarized by Governing:

[Moody’s] issued an analysis on Nov. 24 that said the “state’s negative outlook indicates the possibility that factors such as further growth in the state’s pension liabilities will drive the rating lower still.” The state is appealing the decision to the Illinois Supreme Court but Moody’s was wary of its chances and pointed out that the top court this summer indicated in a separate case on retiree health benefits that would adhere strictly to the pension protection clause.

A top Moody’s official commented further in a WUIS report:

“The average state from our perspective or the expected rating for a state is AA1, which is our second highest rating. And so Illinois is A3, so that’s five rating notches below that,” said Ted Hampton, a Vice President at Moody’s Investor Service. “Which is to say, it’s still an investment-grade rating. It’s still a strong rating in the context of every kind of security that we rate. But it’s far below all of the other states.”

Hampton says Moody’s saw Illinois’ passage of the pension overhaul as beneficial, but not enough to move the credit ratings needle – because a court challenge was suspected. The recent court ruling likewise wasn’t not enough to prompt a change, though Moody’s called the decision “credit negative” in a notice sent out Tues., Nov. 24.

“We do get a lot of inquiries about states, particularly Illinois where there are problems that are in the news, and where the situation is in flux. And publishing these comments helps us get our opinion out to those investors, or to the general public,” Hampton said.

Fitch and S&P said the pension ruling didn’t move the needle much as far as the state’s credit rating. From Governing:

Fitch Ratings and Standard & Poor’s were far more forgiving. Both said they had already factored in the likelihood of court challenge into their current ratings for Illinois. “More importantly, from a credit perspective,” S&P added, savings from the pension reform are not included in the fiscal 2015 budget.”

Interestingly, Fitch’s main concern wasn’t the pension ruling. Instead, the agency said the real concern was the expiration of several tax increases. From Governing:

Fitch did note another trouble spot for Illinois’ credit lurking just ahead: the scheduled expiration of temporary tax increases in 2015. “The state passed a placeholder budget for the current fiscal year with a stated intent to revisit the issue after the November elections,” Fitch said. “Taking steps to address the long-standing structural mismatch between revenues and spending would put the state on more solid financial footing, while failure to take action would be a return to past practices and leave the state poorly positioned to confront future downturns.”