Tapping the brakes on Illinois debt?
Illinois, the state in the weakest fiscal position, is planning two big bond deals in the first quarter of 2012. Next week they plan to raise $800 million in general obligation bonds to finance various transportation projects, followed by another $750 million later this winter in long-term bonds to fund construction projects.
Although the state is drowning in debt, unfunded pension liabilities and unpaid bills, these debt offerings are very restrained compared to the last two years when it borrowed to make obligatory payments to its heavily underwater pension system.
The State Treasurer, Dan Rutherford, had opposed issuing debt to fund pension obligations and managed to raise the alarm among his former colleagues in the Illinois legislature about the dangers of endless borrowing. Rutherford’s actions may have reversed the momentum of Illinois’s debt issuance. He is certainly the first fiscal officer that I have heard of who threatened to call the rating agencies to slow his state’s bond issuance.
In another important step for the cash-strapped state, Illinois raised the personal income tax last year:
An income tax hike enacted in early 2011 that will raise $6.8 billion in new revenue annually helped ease the state’s cash flow and budget woes, but its unfunded pension obligations still pose a daunting challenge to efforts to stabilize its fiscal house. The state’s funded ratios were the lowest among states last year based on fiscal 2010 results.
The latest review based on fiscal 2011 figures shows Illinois’ unfunded [pension] liabilities rose to $82.9 billion for a funded ratio of 43.4% from $75.7 billion for a funded ratio of 45.4% in fiscal 2010.
The need to fund pension liabilities is crushing Illinois. Reform must be pretty radical to move the system to a more sustainable level of pension funding, but the state government seems to be dithering:
Pending pension reform legislation aimed at cutting the state’s longterm liabilities and improving the health of the pension systems is among the major issues facing Illinois lawmakers as they return to work this month. SB 512 was headed towards approval last spring before it stalled amid union opposition. The bill would protect the accrued benefits already earned by current employees
In his budget request for 2011, Governor Pat Quinn seemed to suggest that there was some hope of a federal guarantee of the state’s pension system, although a local member of Congress put the kibosh to that idea:
In the governor’s proposed budget, the options for “significant long-term improvements” in its five pension systems included “seeking a federal guarantee of the debt” as well as curtailing public employee retirement benefits, borrowing more and increasing annual state pension contributions were identified as other choices. U.S. Rep Peter Roskam from Illinois said that there was no chance of the federal bailout of the state pension system.
The motto of Illinois is “State sovereignty, National Union,” but when it comes to the debt of fifth-most populous state, they are on their own. It’s highly unlikely that Congress or the Federal Reserve will step in to backstop the state, and the rating agencies and bond markets will soon start tightening the screws and raising the state’s borrowing costs, which would really hurt. There is really only one option: a messy fight to get public workers’ pension contributions and benefits to a sustainable level. The math suggests that is the only viable solution to Illinois’ fiscal woes. The legislature granted these benefits and they are the body that must modify them.
Illinois, you are muniland’s weakest player. Right your course before the bond vigilantes crack the whip.