CHICAGO (Reuters) - Illinois’ inability to fix its woefully underfunded public pension system could derail plans by the state to continue to issue debt to fund an ongoing infrastructure improvement program, Governor Pat Quinn said on Monday.
“You can’t do that building and issue those bonds if you have this severe situation overlooking you,” the Democrat governor said at a media briefing hosted by Bloomberg News, adding that the state could face more downgrades of its already relatively low credit ratings.
That in turn could raise borrowing costs, leaving fewer dollars to spend on construction that boosts the state economy, Quinn added.
Inaction on a huge unfunded pension liability and structural budget deficit has already fueled downgrades this year. In January, Moody’s Investors Service dropped Illinois’ rating to A2, the lowest rating among the U.S. states it rates. Standard & Poor’s Ratings Services cut Illinois to A with a negative outlook in August.
Illinois sold $5.1 billion of bonds so far this year, making it the third-biggest debt issuer in the U.S. municipal market in the first three quarters of 2012, behind the New York State Dormitory Authority and California, according to Thomson Reuters data. Illinois, the fifth most populous U.S. state, is projecting it could sell $1.5 billion to $2 billion of bonds for its construction program between January and August 2013, according to John Sinsheimer, the state’s capital markets director.
The state’s fiscal woes have led investors to demand hefty yields to buy its debt, with Illinois’ so-called credit spread over Municipal Market Data’s benchmark triple-A scale the second-highest behind Puerto Rico among government issuers tracked by MMD.
Illinois’ credit spread for 10-year bonds has tightened, however, to 129 basis points in the week ended December 7 from 140 basis points in the previous week. Almost a year ago, the spread was a much-wider 174 basis points.
Quinn said his deadline for state lawmakers to pass pension reform legislation is January 9. The Democrat-controlled General Assembly, which returns for a lame-duck session on January 2, failed to pass pension bills during its regular session that ended in May or during a special session the governor called in August.
“We don’t want to end up like the Titanic. We don’t want to sink. We’ve got to act,” Quinn said, who noted the state’s pension liability grows by about $17 million a day.
Years of skipping or skimping on pension payments left Illinois with an unfunded liability of $96.8 billion at the end of fiscal 2012, a sharp jump from $83 billion in the prior fiscal year. The funded ratio, which was already the lowest among states, sank to 39 percent from 43.3 percent. A funding level of 80 percent is considered healthy.
Quinn said his administration was involved with actuarial number crunching for a bipartisan proposal that was unveiled by House lawmakers last week.
That plan would boost worker contributions, raise retirement ages and limit cost-of-living increases for retirees, with the aim of fully funding the pension system in 30 years. It would also gradually shift pension payments currently made by the state onto local school districts, universities and colleges.
The governor said the proposal includes reforms he has sought, adding that any new pension-related laws will inevitably be challenged, leaving state courts to decide if they are constitutional.
A coalition of public worker unions and Senate President John Cullerton have raised questions on whether the measure could violate protections of pension benefits in the Illinois Constitution.
Quinn said pension payments, which jumped to more than $5 billion in the current fiscal year from $1.4 billion a few years ago, would squeeze out funding for essential services such as education, health care and public safety.
Reporting By Karen Pierog, additional reporting by Caryn Trokie in New York; editing by Andrew Hay and Dan Grebler