Monday, February 3, 2014

In Illinois, Fitch Ratings Remain Negative Despite So-called “Pension Reform” or the Breaking of a Constitutional Contract with Public Employees/ Do You Remember Fahner's Video... and the Justice Department's Lawsuit...?


“…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.


“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.


“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 '

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..."

“[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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