CHICAGO – Illinois needs a plan to tackle its rising tab for pensions and other fixed costs like retiree healthcare and debt service or its risks a drop into speculative grade territory, Moody’s Investors Service warns in a new report published as lawmakers were casting final votes on a budget package.
Without any revenue increases or legislative action to reduce the retirement burden, Illinois’ total fixed costs could exceed 30% of state-sourced revenue next year, Moody’s warned. State expenses – before passage of the budget – for pensions, retiree healthcare and debt will grow by $1.3 billion, or 10%, in fiscal 2019.
Pensions will account for more than half while debt service will rise by 17% as the ledger now reflects $6 billion of borrowing last year to pay down the bill backlog. Pension costs are on track to keep outpacing the state's revenues and economy.
“A failure to adopt mitigating strategies soon will greatly increase the state’s risk that these rising costs will become unaffordable without severe public services cuts,” reads the report, “Illinois Facing Inflection Point as Unfunded Pension Burden Poised to Accelerate.”
Given the magnitude and growth trajectory, the state’s unfunded pension liabilities will likely require multiple measures to address, said Moody’s analysts Ted Hampton and Tom Aaron.
Options include revenue hikes, shifting some of the funding responsibility to local governments and public universities, or new efforts to reduce benefits. “All of these approaches face potential political or even legal impediments, but the risks of inaction are significant for the state’s credit quality,” the report read. Gov. Bruce Rauner proposed a cost-shift but it’s not included in the budget package that passed Thursday. The state can’t cut benefits due to strong constitutional protections.
The report provided a reminder for lawmakers of the state’s daunting fiscal challenges led by its $129 billion unfunded pension tab as their budget debate was focused on the accomplishment of reaching what they called a “balanced” budget through compromise and trust.
The budget proposal does include several pension measures projected to trim $445 million in annual contributions but whether analysts consider that as having a material impact remains to be seen. Moody’s spokesman David Jacobson said because the budget was not yet final the pension measures were not factored into the analysis.
The review offered a poor assessment of state actions to date and issued several warnings. “Part of the problem is that state officials always face the temptation of making the ultimate reckoning worse by pushing costs to the future, and they’ve used that approach many times in the past,” Hampton said.
“Easing funding in favor of fiscal relief could erode the state's credit,” Aaron said.
The weight of the pension funding burden also leaves the state more exposed than others to the negative impact of a recession. Investment losses coupled with a drop in general fund tax revenues would pose a double blow and “the state's pension funding and overall fixed-cost burden could eventually become unsustainable, unless offsetting actions are taken,” said the report.