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Bond-rating firm hits state for pension inaction
SPRINGFIELD-Gov. Pat Quinn warned that Wall Street bond-rating firms wouldn’t take kindly to the Legislature’s inaction this week on pensions.
He was right.
FitchRatings Friday placed its “A” rating on $26.2 billion in outstanding state general obligation bonds on “rating watch negative.”
While not considered a rating downgrade, it is a “warning of potential, future rating action,” Fitch analyst Karen Krup told the Chicago Sun-Times.
The move may not have a direct impact on the state’s finances and posts “very minimal risk” to existing state bond holders, but it ultimately foreshadows a downgrade that would lead to higher borrowing costs the next time Illinois goes to market for long-term loans unless lawmakers deal with pensions, she said.
“The immediate result, to be honest, is probably nothing. It doesn’t affect what they’re doing on a day-to-day basis,” Krup said. “But for direct impact on the state, when they try to go to market the next time, there could be implications on borrowing costs.”
Further explaining its move, the company said the new status “reflects the ongoing inability of the state to address its large and growing unfunded pension liability, most recently through the failure to pass pension reform in the ‘lame duck’ portion of the 97th General Assembly legislature that ended on [Tuesday].
“Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable,” the company said in a prepared statement that gave the state six months to pass a solution to the pension crisis or risk a downgrade.
A Quinn administration official said lawmakers should take notice of FitchRatings’ move.
“The Fitch report speaks for itself,” said Abdon Pallasch, assistant budget director. “This should be required reading for every member of the new General Assembly. We have an emergency, and it’s not going away.”
House Minority Leader Tom Cross (R-Oswego) said the warning from Fitch amounts to a call for action.
The move “is embarrassing and may cost the state more money–money that we clearly do not have. How many more times do we have to be downgraded to prompt action in the General Assembly?” he said in a prepared statement. “I have worked and will continue to work with other members in the House and Senate to pass meaningful pension reform.”
State Treasurer Dan Rutherford said the Fitch announcement could be a prelude to a ratings downgrade and should prod lawmakers into action on pension reform.
“Failure to enact pension reforms will eventually bring Illinois to its financial breaking point, and it will be worse than any fiscal calamity we have seen thus far in this state,” the GOP treasurer said. “Our state’s credit rating cannot afford to take another hit.”
State Rep. Elaine Nekritz (D-Northbrook) and Rep. Daniel Biss (D-Evanston), the two architects of a pension-reform package that stalled in the House, said Fitch’s move underscores the looming financial calamity that awaits the state without reeling in pension costs.
“This announcement just confirms what we have feared and warned about: our state finances are in real trouble,” the pair said in a joint statement. “We must act quickly and decisively to address the pension problem and send a strong message that Illinois is serious about getting its fiscal house in order for the long term.”