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Last week, Moody’s credit rating service announced that it would sustain its current rating for the state of Illinois at Baa3, one level above “junk” status, making Moody’s the third of three major credit rating agencies to not take the final step of downgrading the state’s debt to the level that would have made it the first state to have ever have its credit reach that rating.
But in having passed a budget that was largely designed by the state’s legislature to keep it from going over the fiscal brink, the state may have only managed to delay its fiscal reckoning. Bloomberg‘s Elizabeth Campbell reports on the accounting shell game that Illinois is now playing:
Illinois’s biggest financial challenge, the $130 billion debt to its workers’ pension funds, may only get bigger thanks to the budget that pulled the government back from the brink.
That spending plan, pushed through by lawmakers eager to keep Illinois’s bond rating from being cut to junk, allows the state to sink deeper into the hole by giving it five years to phase in hundreds of millions of dollars in increased contributions to four of its five retirement plans. Those extra payments stem from the funds’ decisions to roll back forecasts for what they expect to make on their investments, which means Illinois will need to set aside more money to ensure it can cover pension checks due in the decades ahead.
“The phase-in of the actuarial assumption is another exercise in kicking the can down the road, but we’re not sure how far the can travels,” said Dave Urbanek, spokesman for the Illinois Teachers’ Retirement System, the state’s largest pension, which has $73 billion of unfunded liabilities. “You pay less now, pay more later.”
By “roll back forecasts,” Campbell is referring to the predicted rates of return that the state’s pension funds are required to use to predict how much their investments will grow in the future, which after years of underperformance, had finally been reduced to more closely match the state pension funds’ actual returns in recent years.
That matters because the higher those rates are set, the less money that the state government needs to budget in order to pay out the state’s generous pension benefits for state and local government employees. By artificially inflating its predicted return assumptions back to the levels that allowed the state to significantly underfund its pension funds in the first place, the state can reduce the amount of money it puts into them.
That unrealistic accounting achieves two things. First, it makes money that may have gone to shoring up the state’s pension funds available to pay off its other debts, which is how the legislature managed to keep the state’s credit rating from collapsing into junk status at this time. Second, it digs the fiscal hole that its pension funds are in, deeper toward insolvency, ensuring that the state’s biggest liabilities will only get worse.
It’s not a question of if Illinois’ credit will be downgraded, but when. When that will happen will be now most likely be determined by the available cash balances of the state’s various government-employee pension funds, which will have less taxpayer cash to make guaranteed pension benefit payments if its investments continue to badly underperform its now legislatively set rate-of-return assumptions. As soon as they run out of cash to cover the lavish, state-guaranteed pension benefits payments to retired state government workers, the slow-motion chain reaction that will lead to junk status for the state’s credit rating will get underway.