Moody's downgrades state bonds, revenues continue slide

Monday, June 07, 2010

Illinois’ bond rating has been cut a notch by Moody’s Investors Service as a new report shows state revenues continue to slide and the pile of unpaid bills continues to grow.
Moody’s cut Illinois’ rating on general obligation bonds from Aa3 to A1, blaming state government’s failure to come up with a permanent solution to its financial problems. Instead, lawmakers relied on a series of one-time fixes to cobble together a spending plan.
“This failure underscores a chronic lack of political will that indicates further erosion of an already weak financial position,” Moody’s said in an opinion about the state’s credit rating.
The report said the state’s credit rating is further threatened by its growing debt burden, large unfunded liabilities for pensions and retiree health benefits, the disparity between spending and revenue and the decision to simply put off paying bills.
“The legislature’s failure to enact recurring budget-balancing measures is consistent with recent years, when infighting between the executive and legislative branches caused budget delays and allows both the erosion of the state’s finances and the widening of severe pension funding gaps,” the report said. “The longer the solutions to the state’s challenges are deferred, the more difficult they will become to implement.”
What the General Assembly did this spring might only make things worse, Moody’s said, including borrowing against tobacco settlement proceeds, relying on more than $900 million in federal stimulus funds and offering a tax amnesty program.
“These plans may provide less revenue than estimated,” Moody’s warned.
One thing the state got right, Moody’s said, was passing reforms that will reduce pension costs for future employees. But Moody’s also noted the state hasn’t resolved how to make its pension payment next year. A bill to borrow up to $4 billion passed the House, but not the Senate. Legislation allowing the state to indefinitely postpone the payment is also pending.
A lower state credit rating usually means it will cost the state more money when it tries to borrow. Gov. Pat Quinn’s budget office said the state plans to borrow $1 billion later this month for capital projects.
Budget office spokeswoman Kelly Kraft said the Moody’s report shows the importance of lawmakers working with Quinn to find a permanent solution to the state’s budget woes. Among other things, Quinn has pushed for an income tax increase which has gone nowhere in the Illinois House.
Quinn’s Republican opponent, Sen. Bill Brady of Bloomington, issued a statement saying the Moody’s report “is yet another independent voice proving the failed economic policies of Governor Quinn has driven our state into the ground.”
Also Monday, the General Assembly’s Commission on Government Forecasting and Accountability issued a report showing revenues in May continued to drop compared to last year. Most of it was because federal reimbursements to the state dropped from what they were in May 2009.
“That was nothing that wasn’t anticipated,” said COGFA revenue manager Jim Muschinske.
Personal income taxes were also down again, indicating a still-weak economy. Sales taxes actually went up by $6 million compared to May last year, but for the year they are still down a “disastrous” $493 million, according to the COGFA report.
At the same time, COGFA anticipated revenues would be down because of the recession and most of the numbers are close to the targets.
“We knew it was going to be bad,” Muschinske said. “What is of concern is the continued slapping of the economy. The market’s nearly wiped out all gains from the previous year. Jobs are still hard to come by. There’s not much out there ot indicate a quick turnaround.”
The state’s bill backlog stands at more than $5 billion, said Carol Knowles, spokeswoman for Comptroller Dan Hynes. The office works with vendors and state agencies to address the most dire situations, she said.
“It’s kind of a triage situation, there’s so many vendors in distress,” Knowles said. “It’s become more and more difficult to address emergencies because of the scope of the backlog.”
Some payments get taken care of first every month, among them the state payroll, general school aid, repaying short-term debt and Medicaid payments that entitle the state to a greater federal reimbursement. Together, those payments total about $2 billion.
Bill backlog
The backlog of bills in the comptroller’s office in early June has steadily climbed in the past few years.
2010 -- $5 billion
2009 -- $2.5 billion
2008 -- $512 million