SPRINGFIELD – Gov. J.B. Pritzker offered an ambitious plan to lawmakers this week to pay down the state’s backlog of unpaid bills, slow down payments into the state’s troubled pension systems while at the same time asking them to put together an ambitious, multi-billion-dollar plan to repair the state’s crumbling roads, bridges, airports and college buildings.
However, in order to accomplish that, the state would need to borrow money — a lot of money. There are significant questions about how the financial markets would respond to that.
All three major credit rating agencies — Moody’s, S&P and Fitch Ratings — currently rate the state of Illinois bonds at one notch above “junk” status. Additionally, there are elements in Pritzker’s plan that some analysts say could cause those agencies to consider making that downgrade, a change that would have dire financial consequences for the state.
Rating agencies don’t use the phrase “junk bonds.” They classify them as “investment grade” and “non-investment grade.” Brian Battle, a director at Performance Trust Capital Partners in Chicago, said that if Illinois does fall into the latter category, it wouldn’t take long for the average Illinoisan to feel the impact.
“The short answer is, if Illinois gets downgraded below investment grade, the cost of government, the cost of services in the state of Illinois goes up,” Battle said. “The cost of living in the state of Illinois goes up."
Rating agencies and financial analysts have warned about Illinois’ credit rating in the past, and the state has still maintained investment-grade status. Still, much of the current concern about Pritzker’s budget plan stems from statements Moody’s made in August 2018, the last time Illinois issued bonds.
Moody’s rated those bonds as Baa3, the lowest investment-grade rating available. But in a report explaining that rating, it outlined a number of factors that could cause the agency to raise or lower the rating in the future.
Among the actions Illinois could take to improve its rating, the agency said, were adopting “a comprehensive plan to address pension liabilities,” and paying down its backlog of bills in a way that, “does not rely on long-term borrowing.”
On the negative side, Moody’s said one thing that could lead to a downgrade would be to reduce payments into the state’s pension systems in order to free up money for other government purposes.
The Pritzker administration has offered what it calls a “comprehensive” plan to deal with the state’s unfunded pension obligations, but it’s one that includes borrowing $2 billion to infuse cash into the system immediately, and then stretching out the timeline for paying down the unfunded liabilities by an additional seven years, to 2052, which effectively reduces the amount of general state revenue that would need to go into the funds.
In addition, Pritzker’s plan for paying down the backlog of bills does indeed call for issuing $1.5 billion in long-term debt.
Ted Dobrowski, who writes for the website Wirepoints.org, which focuses on Illinois politics, finances and economy, said those are all actions that rating agencies could view unfavorably.
“If you’re looking at Illinois and that’s the best Illinois can do, I can’t see them having any positive consequence, and a downgrade would be appropriate,” he said.
The Pritzker administration, though, strongly disagrees with that assessment.
“The governor proposed a realistic plan to serve as a bridge to the future, with the ultimate goal of a fair tax system that will transform state finances, including pensions,” press secretary Jordan Abudayyeh said in a statement. “No element of our comprehensive pension approach can be viewed in isolation, and we expect the markets will look favorably upon infusing cash and assets into the system and dedicating more revenue from the fair income tax over and above scheduled payments.”
The biggest consequence of a downgrade to junk status, both analysts said, would be that certain kinds of investors — insurance companies, other pension systems and specific types of mutual funds — would be prohibited from buying Illinois bonds.
That would leave only a certain category of investors, what some people in the industry call “vulture funds,” to lend the state money, and they would charge much higher interest rates. The consequences of such action, in turn, would mean that a greater percentage of the state’s tax receipts each year would go toward debt service, and less could be used for things like education, social services and public safety.
Pritzker is also proposing adoption of a multi-tiered, or “graduated” income tax structure that would levy heavier taxes on upper-income individuals in order to generate more money in future years. And the governor is proposing to sell off surplus state assets to generate additional cash that could be put into the pension plans.
Those are items that the analysts said would likely be viewed by rating agencies as positive developments. But they have yet to pass the General Assembly, and a change in the state’s tax structure requires a constitutional amendment that couldn’t be put before voters until November 2020.
A spokesman for Moody’s, meanwhile, said the agency does not comment on budget proposals. But it likely will review the state’s fiscal condition after a final budget and pension plan is passed.