Illinois Governor Pat Quinn called lawmakers back for a special session on June 19 less than two hours after Moody’s Investors Service cut the state’s credit rating, citing an unresolved pension crisis.
Legislators on May 31 adjourned without taking final votes on dueling proposals to reduce an unfunded liability of almost $100 billion in the state retirement system that grows $17 million daily. It was the third time in less than a year that politicians failed to pass measures to deal with the shortfall.
Political paralysis over the deficit led Moody’s to drop its grade on general-obligation bonds issued by Illinois one step to A3 today. It’s the fourth-lowest investment grade and the weakest among U.S. states. The cut affects $32 billion of debt. A lower rating generally signals higher borrowing costs.
“Time and time again over the past two years, I have proposed, asked and pushed members of the General Assembly to send me a comprehensive pension reform bill,” Quinn, a 64-year-old Democrat, said in a statement announcing the special legislative session.
“Failure to act by deadlines has resulted in the bond rating agencies lowering our credit rating, which hurts our economy, wastes taxpayer money and shortchanges the education of our children,” Quinn said. Fitch Ratings cut the state’s grade a step to A- on June 3, citing the pension crisis.
The new Moody’s rank is four steps above junk status, equivalent to the A- rank assigned by Fitch and Standard & Poor’s. All three companies have a negative outlook on the state’s credit, signaling more cuts may be made.
Moody’s reduction pushes Illinois’s rating two steps below the company’s grade on California debt, the second-lowest level among states.
“The legislature’s political paralysis to date shows not only the magnitude of Illinois’ unfunded benefit liabilities, but also the legal and political hurdles to legislation that would make pensions more manageable long term,” Moody’s said today in a report.
Investors in the $3.7 trillion municipal market already demand 1.43 percentage points of extra yield over benchmark debt to own bonds of Illinois issuers, the most among states tracked by Bloomberg Fair Value indexes. The gap over debt issued by California is just 0.52 percentage point.
Negotiations over a pension fix stalled last week because the Speaker of the House of Representatives, Michael Madigan, and Senate President John Cullerton, both Chicago Democrats, couldn’t agree on how to restructure the retirement system. Deliberations were complicated by constitutional protections afforded to pension benefits in Illinois.
S&P won’t cut the state’s grade after the latest round of inaction because it was “in line with our expectations in January,” the New York-based company said in a report today.
Only three states -- California, Louisiana and Massachusetts -- have been rated in the lowest investment-grade tier, starting one step below Illinois’s score, in the last 50 years, S&P said.