Greising: Moody’s Upgrades Illinois’ Outlook — With a Catch
BGA President David Greising writes a regular column for Crain's Chicago Business.
The decision by the Moody’s credit rating agency late last month to take Illinois off the watch list for a possible downgrade to “junk” credit status was a good news/bad news/painful news event. The good news is that Illinois will avoid becoming the first state to collapse to a “junk” credit rating, at least for the next 18 months. The bad is that one of any three major risk factors still could cause Illinois’ ratings to plunge. And the painful is that there is no plausible plan to address the state’s crushing debt burden, billions of dollars in unpaid bills and severe pension underfunding.
No one affected by Illinois’ shabby fiscal condition has any good cause to rest easy. And in government, the person who handles these problems day to day is Susana Mendoza, the state’s Democratic comptroller. It is Mendoza’s job to pay the state’s bills. In a state like Illinois, which faced a $16.7 billion backlog of unpaid bills as recently as last November, it can be a thankless and even fruitless task. And when Moody’s names risk factors that might plunge Illinois into junk status, as the agency did late last month, it rivets Mendoza’s attention.
In Moody’s view, any of three factors could plunge Illinois into junk status: a sharp jump in the state’s unpaid bills, a reduction in state pension contributions or a move by the state to absorb the pension liabilities haunting Illinois’ hundreds of local governments.
To hear Mendoza tell it, none of the threats are plausible. She practically scoffs at the last one. “That’s not even on the radar,” she says.
Mendoza has a point. There has been no discussion of having the state absorb local pension liabilities. If anything, the talk has flowed the other way. Mendoza’s political nemesis, Republican Gov. Bruce Rauner, this spring talked about shifting some of the state teachers’ system’s liabilities to local school districts. Like many Rauner polemics, that one went nowhere.
The Moody’s daydream makes no mathematical sense, either. Weak as many of Illinois’ nearly 670 local funds are—underfunded in aggregate to the tune of $58.6 billion—the statewide funds are much worse. The five statewide pension systems are underfunded by $126.5 billion, with a precarious 39 percent funding ratio. That’s less than half the ratio expected for a healthy public pension fund.
Moody’s concern about the second risk factor—a reduction in state pension payments—reflects Illinois’ sorry payment history. The state never will shake off the blot of the infamous “pension holiday,” in which lawmakers a decade ago sharply reduced pension payments for two straight years. Mendoza and others say that nothing like that could happen again. But bond investors, burned once, won’t stop worrying about getting burned again.
Then there’s the first Moody’s risk factor—the one that, more than any other, is Mendoza’s responsibility. Moody’s is worried Illinois might backslide on its bill backlog. Mendoza counters, says that won’t happen and provides a reason to believe she might be right. With some help from an income tax that has brought in extra revenue, she has made progress in whittling down the unpaid bills from their peak last fall. In response to the sharp growth in overdue bills last year, Mendoza helped engineer the sale of $6.4 billion in bonds last fall that also helped cover some of the debt.
For people who remembered then-Gov. Rod Blagojevich’s pension bonds—a bait-and-switch in which the governor sold bonds to pay down pension obligations, then used the proceeds to fund a state spending spree—the “backlog bonds” were a scary sight. But Mendoza was as good as her word. Not only did she pay down the bills; she targeted the payments in a way that brought in federal matching funds. The upshot: Nearly $9 billion in overdue bills was paid, according to Mendoza’s calculation.
Mendoza is not done, either. The legislature has approved an arrangement under which the state treasury will lend $2 billion in state funds, at a low interest rate, to Mendoza’s office. Mendoza plans to use the money to pay down the bills even more. Rauner and other critics see such borrowing as an ill-advised effort to mortgage the house in order to pay the credit cards. But the controller will pay roughly the same rate as for last year’s bond issue, and these interest payments will go into state coffers, not into the pockets of private investors. “We’ve got it under control,” Mendoza says of the bill backlog.
Moody’s is right to be cautious about Illinois’ outlook. The state’s sordid fiscal history demands strong doses of skepticism. But finally, after decades of mismanagement, there are signs that at least some of Illinois’ vexing fiscal troubles are being wrestled to the ground.