Illinois state government has canceled a $500 million debt sale, just days after Standard & Poor’s downgraded the state’s credit rating to the worst in the nation.
S&P put most of the blame for its downgrade on the state's pension problems. The agency dropped the rating on the state's general obligation bonds to A- from A and similarly downgraded the $500 million in general obligation bonds the state was about to sell. S&P also hinted at a further downgrade by saying the state’s credit outlook remains negative.
The agency’s action came despite Illinois raising taxes by $7 billion a year in 2011. Nearly all the additional money has disappeared down the gaping maw of unfunded pension liabilities. Conservative estimates place the state’s unfunded pension liabilities at nearly $97 billion, worst in the nation. The liability grows $17 million a day, according to the governor’s office.
The state also owes more than $27 billion on existing debt and remains months late paying $9 billion of bills to vendors that supply services to the state. Some vendors have gone out of business as a result.
‘Negative Outlooks’ Everywhere
In addition to the S&P downgrade, the Fitch Ratings agency recently announced it had put Illinois on watch for a likely downgrade. The third major ratings agency, Moody’s Investor Service, has Illinois on a “negative outlook.”
S&P's latest move is the seventh downgrade of the state's credit or bonds since Illinois imposed its record tax increases in 2011, according to the office of State Treasurer Dan Rutherford. Those increases raised the personal income tax rate 67 percent and the corporate tax rate 46 percent.
"Our conversations with potential bidders [to buy the state’s debt] lead us to believe the market is unsettled because of recent actions and comments by the bond-rating agencies," said Abdon Pallasch, the state's assistant budget director, in a statement. "We plan to schedule a new bond sale after the markets have had time to digest the news."
Shielded by ‘Accounting Gimmicks’
“We have known for years accounting gimmicks kept pension obligations separate from other debts,” said Sheila Weinberg, founder & CEO of the Illinois-based Institute for Truth in Accounting. “But the truth is finally coming out, and it’s going to be up to citizens to decide the solutions.”
She said each Illinois taxpayer owes $38,500 in state debt, four times the U.S. average of $9,586.
New Standards, Worse Problem
The state pension problems may be even worse than they appear. The Governmental Accounting Standards Board next year will put in force stricter accounting rules to more accurately account for retirement liabilities. Under the current standards, Illinois’s government pension system for teachers, the state’s largest pension system, has about 48 percent of the money needed to pay obligations.
Under the more accurate GASB rules, the state's Teachers Retirement System would have just 18.8 percent of the necessary funding, said David Denholm, president of the Public Service Research Foundation.