HIGH LONG-TERM
LIABILITIES
“…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. Illinois is among the
weakest of the states in terms of its ratio of debt and unfunded pension
liabilities to personal income, at 25%, well above the median of 7% for states
rated by Fitch.
“As of the most recent actuarial
valuation, dated June 30, 2013 and prior to enactment of Act 98-0599, the
unfunded actuarial accrued liability was reported at $100.5 billion, resulting
in a system-wide 39.3% reported funded ratio. Annual pension funding
requirements have been increasing significantly and growing pension payments
have been crowding out other expenditure growth and absorbing revenue growth.
Pension payments from the general fund increased $965 million to $5.1 billion
in 2013, an increase of 23%, reflecting in part the use of more conservative
investment return assumptions. Pension payments increase a further 17.3% to $6
billion in fiscal 2014.
“Pension reform is expected to both
reduce unfunded liabilities and temper the growth in pension payments required
by the state. Fitch believes the enacted reforms would provide a substantial
improvement in the funding scheme for the state's pensions by moving to a
closed ARC funding schedule with a goal of 100% funding (versus the prior
statutory plan that only targeted 90% funding) and requiring significant
payments above what the ARC would indicate once outstanding series 2010 and
2011 pension obligation bonds mature.
“Fitch has stated that pension reform
that enhances the funding levels of the pension systems and controls the
growing impact of pension payments on the budget is necessary to stabilize the
credit. The state's actuarial analysis of the reform does indicate progress
toward this goal; with estimated savings of $145 billion over the next 30 years
and a $24 billion reduction in unfunded liabilities should the reforms be found
constitutional. Legal protection of
pension benefits is particularly strong in Illinois and while the state
believes it has made sufficient accommodation to survive the constitutional
challenge, the outcome of litigation is unknown and could have a negative impact
on the state's fiscal operations.
“The state's net tax-supported debt, at
5.8% of 2012 personal income, is at the high end of the moderate range and debt
levels have increased with the state's issuance of General Obligation (GO)
bonds for operational purposes in fiscal years 2010 and 2011. Illinois provides
a strong GO bond pledge, including an irrevocable and continuing appropriation
for all GO debt service, and continuing authority and direction to the state
Treasurer and Comptroller to make all necessary transfers from any and all
revenues and funds of the state. The state funds debt service one year ahead on
a rolling 12-month basis.
COMPREHENSIVE BUDGET
SOLUTIONS STILL NEEDED
“The temporary increase in tax revenue,
in conjunction with enacted hard spending limits moved the state closer to
budgetary balance for fiscal years 2011 through 2014. Medicaid reforms
implemented in the fiscal 2013 budget also made significant progress toward
alleviating some pressure on the general fund. However, the tax increases will begin to phase out in 2015; thus, even
if the state maintains budget balance to that point, it will once again be
faced with a significant budget balancing decision to make permanent the tax
increases, make severe expense reductions, or identify new revenues.
“The enacted budget for fiscal 2014,
which began July 1, is conservatively based on an assumed decline in revenue
following a strong fiscal 2013 and controls most discretionary spending to
accommodate growing pension payments and increased healthcare expenses. Despite
the assumption of reduced revenues, tax revenues through December have
increased 4.9% on a year-over-year basis. Solid year-over-year growth is seen
in personal income tax receipts (+4.9%), corporate income taxes (+10%) and
sales and use taxes (+5.4%). The budget
is expected to be balanced on an operating basis within the limitations of the
pre-reform pension funding schedule, but does not address the accumulated
accounts payable backlog beyond applying any operating surplus to reducing the
backlog.
MODERATE ECONOMIC
GROWTH
“The Illinois economy is centered on
the Chicago metropolitan area, which is the nation's third largest and a
nationally important business and transportation center. Illinois' economy has gradually shifted, similarly to the U.S. in general,
away from manufacturing to professional and business services. The
remaining manufacturing sector includes more resilient non-durables, and is
less concentrated in the auto sector than are surrounding states (Indiana,
Michigan, and Ohio).
“While
the state economy was not as negatively affected by the recession as some of
these neighboring Midwestern states, it did contract faster than the national
economy. Total non-farm employment declined
4.9% in 2009, versus the national rate of 4.4% and essentially matched the U.S.
rate of decline at 0.8% in 2010. Modest growth resumed in 2011 with
year-over-year job gains of 1.1% followed by 1.2% growth in 2012, weaker than
the U.S. rate of 1.7% in 2012. Illinois' job recovery continues to be weaker
than the national recovery; non-farm employment grew 1.1% as of December 2013
while the U.S. grew 1.6%. The state's unemployment rate has typically exceeded
that of the U.S. over the past decade and was 128% of the U.S. at 8.6% as of
December 2013. Wealth levels remain above average. Per capita income is 104.8%
of the national average, fifteenth among the states.”
Additional
information is available at 'www.fitchratings.com
This report is from Fitch Rates $1 Billion Illinois GO Bonds 'A-';Outlook Remains Negative
In Addition:
Do You Remember the
Video Segment of Ty Fahner Talking about Compelling Bond Rating Agencies to
Lower Illinois' Ratings?
Fahner: “The Civic Committee, not me, but me and some of
the people that make up the Civic Committee… did meet with and call – in one
case in person – and a couple of calls to Moody’s and Fitch and Standard &
Poors, and say, 'How in the hell can you guys do this? ...You're an enabler to
let the state continue. You keep threatening more and more and more.' And I
think now we backed off because we don't want to be the straw that breaks the
back. But if you watched what happened over the last few years, it's been steadily
down... We have told [the Bond Rating Agencies] that they are being
irresponsible..."
http://teacherpoetmusicianglenbrown.blogspot.com/2013/08/the-video-segment-of-ty-fahner-talking.html
“[Do You Also Remember] earlier this year
[2013], the Justice Department filed a $5 billion lawsuit against
Standard & Poor's -- one of the nation's Big Three credit rating agencies,
which also include Moody's and Fitch? The lawsuit accuses S&P of knowingly giving AAA ratings
to financial products the agency's analysts understood to be unworthy.
Handing out sparkling
ratings to deeply flawed securities represents a serious breach of trust on the
part of a credit rating agency. But it was common practice for the Big Three.
And in no small way, this practice enabled the financial meltdown of 2008…”
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