Illinois’ credit rating received a warning today from Fitch Ratings. What Fitch cited as the “ongoing inability of the state to address its large and growing unfunded pension liability” means a rating downgrade is likely unless reforms are passed within six months.
That warning is just another whack for a state that already has been downgraded by the three major credit rating agencies 10 times since Gov. Pat Quinn took office.
The rating agencies have pounded the state for its overborrowing, overspending and misgovernance since 2009. Last year, Moody’s Investors Service gave Illinois the worst credit rating in the nation – even worse even than California, the nation’s other basket case.
The rating agencies are worried about Illinois’ out-of-control finances. The state’s debt and unfunded obligations now total more than 40 percent of the state’s $670 billion GDP. That includes not only the traditional bonds the state issues, but also the massive amounts of unfunded government employee pension and health care liabilities that the Legislature seemingly ignores. Now, new transparency and accounting rules are exposing the true risk of individual states, and Illinois’ story is unmatched. Illinois has the worst-funded pensions in the nation.
Based on official numbers, the state’s $96 billion shortfall means Illinois’ five pension systems are only 39 percent funded. But under newly proposed accounting standards, the real shortfall exceeds $200 billion, dropping the funding level to a dangerously low 24 percent.
Those liabilities are on top of the state’s $54 billion in unfunded health benefits for retired government workers. Surprisingly, the state has not set aside any funds for these liabilities, even as they grow faster than the state’s problematic pensions.
The State Budget Solutions 2012 State Debt Report has analyzed state debt and obligation data across the nation. Comparing Illinois’ total liabilities with the state’s GDP, Illinois’ credit load has reached dangerous levels. Its liabilities to GDP ratio is now the seventh-highest in the country, and at 40.4 percent, it’s crowding out growth, job creation and prosperity.
But ratings also are affected by lawmakers’ inability to enact meaningful reforms – hence Fitch’s warning. That’s why passing the right reforms is critical.
Unfortunately, none of the bills proposed by the Illinois Legislature take Illinois out of its crisis. The recent Nekritz-Biss plan is a case in point. Civic groups and the media have touted this plan as reform, but it’s simply not reform. The Nekritz-Biss bill would worsen the pension crisis, not fix it.
The state can’t afford to just pass something – anything – on pension reforms. The Legislature must pass the right thing, and that’s a bill that stops the unfunded liability from growing uncontrollably. Getting rid of the defined benefit plan going forward and moving to a defined contribution plan, like 401(k)-style plans in the private sector, will stop the bleed.
The rating agencies are waiting.