Illinois' inability to address its financial problems could result in another drop in its credit rating and more costs for taxpayers.
With Illinois already having the worst credit rating of any state in the nation, can it get any worse? Apparently so.
Moody's Investors Services downgraded the state's credit outlook from stable to negative last week, sending a signal ahead of the lame-duck legislative session that begins Jan. 3 that there will be consequences if legislators and the governor don't address the state's intractable financial problems.
Illinois has seen its credit rating downgraded numerous times in the last decade by ratings services. Moody's judges Illinois' credit rating as the worst in the nation, while Standard & Poor's ranks Illinois ahead of only California. Last week's action by Moody's did not change its actual rating of the state's $28 billion general obligation debt from A2 — the worst credit rating given to any state — but did signal that Moody's could lower that rating once again on worries about Illinois' ability to come to grips with its staggering financial woes.
A downgrade in the state's credit rating could increase the cost of borrowing money to pay for state construction projects even with historically low interest rates. State Treasurer Dan Rutherford said the move will affect taxpayers.
"What this outlook means is if we do not act, then they will continue to take us down," Rutherford said. "The thing I want to make real clear is this does have impact on the taxpayers of Illinois."
Rutherford maintains that the low rating already has cost taxpayers an extra $70 million in interest on $800 million in borrowing made in recent months.
In its report, Moody's cited the state's "severe pension shortfall" and poor long-term money management practices, including delays in paying bills and its obligation to pay health care benefits for retirees. It also seemed to express pessimism that the state could effectively deal with the pension shortfall.
"The negative outlook reflects our view that the state's pension funding pressures are likely to persist and perhaps worsen in the near term," Moody's report said. "Moreover, fiscal 2014 marks the last year before Illinois' 2011 income tax increases are partly unwound, putting the state on track to deal with simultaneous growth in pension funding needs and loss of revenue. If the Legislature in coming weeks or months enacts significant pension reforms, they are almost certain to be challenged, given the state's constitutional protection of retiree benefits. Political pressures, coupled with the threat of litigation, may mean that any reforms enacted have only a marginal effect on liabilities."
The Legislature's unwillingness to deal with the pension situation while the liability continues to grow has been stunning. To his credit, Gov. Pat Quinn has been prodding the General Assembly to deal with pension reforms, but legislators have preferred to dither rather than deal with a politically difficult issue largely of their own making. In the meantime, the problem just grows worse. The estimated pension shortfall has grown from $85 billion to nearly $100 billion in 2012.
Quinn says he's optimistic that legislators can agree on a sweeping pension reform plan in the lame-duck session by Jan. 9. We hope he's right. Failure to do so will delay any reform until spring at the earliest, and the problem will only worsen.
There are some hopeful signs. Twenty-one members of the Illinois House stepped forward last earlier this month with a plan to reform the state pension system. It probably has little chance of passage, but it's a start. The fact is that nothing will happen until Democratic leaders — Speaker Michael Madigan and Senate President John Cullerton — say so. We can only hope they don't delay any longer.