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Moody's Targeting Pension Woes?

Submitted by Leo Kolivakis on 09/24/2010 01:50 -0400

Lorene Yue of Chicago Business reports, Moody's goes negative on $25B in Illinois bonds:

Moody's
Investors Service Inc. on Thursday lowered its rating outlook for
Illinois' general obligation debt, citing the state's continuing
problems funding is pension program and a fiscal shortfall.

The state's rating now stands at A1 with a negative outlook. It previously stood at A1 with a stable outlook.

The change will affect roughly $25 billion in general obligation bonds.

"The outlook for the state of Illinois
is negative, reflecting the state's fiscal deterioration as
demonstrated in its fiscal 2009 audit, as well as a heightened potential
for further weakening as a result of economic underperformance and the
inability to meet statutory pension funding requirements," Moody's
analysts said in its report.

Thursday's move follows a series of
downgrades that began in April 2009. In the last change, on June 4,
Moody's set the A1 rating with a stable outlook, lowering it from Aa3
with a negative outlook.

"The June downgrade was based in large
part on the state's failure to enact significant recurring measures to
address its structural budget imbalance for the fiscal year starting
July 1, 2010; its reliance on delays of payments other than debt
service, and the magnitude of the state's pension liabilities in
relation to available resources," Moody's said in Thursday's report.

Illinois' debt downgrades have hurt related state agencies. The Regional Transportation Authority's rating was lowered to Aa3 from Aa2 due to its exposure to state funding.

Moody's
said that the state does have the ability to raise revenue and reduce
spending, both of which could help improve its rating and outlook.

You'll recall Illinois' TRS response to the "death spiral" comments. Michael Schuselle sent me some recent comments on how Illinois is #1 in underfunded pensions and asks whether Illinois pension funding disclosures are fraudulent. Both comments are worth reading carefully.

And Moody's is targeting other states too. Lisa Fleisher of NJ.com reports, Credit agency gives Gov. Christie's plans for N.J. economy mixed reviews:

Gov.
Chris Christie's plans to remake New Jersey’s economy got mixed
reviews from a credit ratings agency, which has put bond investors on
notice the state is still in unstable territory.

Moody’s
Investors Service said in a note issued this evening it believed New
Jersey would have trouble closing its structural budget deficit — the
gap between taxes and revenue, and how much the state has pledged to
spend — in part because the federal stimulus is scheduled to expire and
the economy isn’t expected to grow quickly.

The
credit ratings agency dinged the state for continuing a pattern of
skipping payments into the pension fund, including a $3.1 billion bill
owed in this year’s budget. The
agency praised Christie for proposing to cut public workers’ pensions
and health care benefits — but noted the plans faced challenges from
lawmakers and unions and wouldn’t, in the "intermediate" term, improve
the health of the pension system.

Although the agency
changed its "outlook" on the state from stable to negative, state
Treasurer Andrew Sidamon-Eristoff today said he was pleased Moody’s
decided to leave the rating unchanged.

"The Moody’s report
does reinforce that rapid passage of Gov. Christie’s reform programs is
critical to preserving the state’s long-term fiscal integrity,"
Sidamon-Eristoff said.

The report noted Christie used several
one-time solutions when crafting a $29.4 billion balanced budget, such
as cutting school aid, municipal aid and property tax rebates, and
dipping into rainy day funds.

Dan Solender, director of
municipal bond management at Lord Abbett, said the market has already
adjusted bond prices for New Jersey’s financial situation, charging the
state more to borrow.

Pension woes will increase state borrowing costs, which is why many
states are scrambling to contain pension costs. With Moody's now
targeting pension woes, many states will be forced to accelerate pension
reforms, but the politics of pensions will be a key factor. Just look
at what is happening in France where workers are striking over pension reforms. Stay tuned, pension tension is heating up.

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Fri, 09/24/2010 - 10:45 | 602404 Don Levit

what'sinaname wrote:

They will be paid in full with interest and yes there is money - YOUR TAX MONEY !!

It's interesting that the federal government assumes its power to tax allows it to continue increasing its liabilities.

I presume the states feel similarly.

There's always room for jel, uh, bailouts.

Don Levit

Fri, 09/24/2010 - 10:21 | 602273 doolittlegeorge

"bond vigilantes." it's still hard to see them or if its just the fog....

Fri, 09/24/2010 - 09:13 | 602029 justtotaketheedgeoff

The public pensions and benefits will not be paid in full because there is no money.

Fri, 09/24/2010 - 10:02 | 602181 whatsinaname

They will be paid in full with interest and yes there is money - YOUR TAX MONEY !!

Fri, 09/24/2010 - 08:44 | 601931 Sudden Debt

They'll be fine. It looks like those people have enough fat reserves to get by without food for the next 20 years or so.

Fri, 09/24/2010 - 08:30 | 601897 apberusdisvet

Meanwhile at the local city, town level there are rumblings as some jurisdictions refuse to make necessary cuts and projected tax bills will be increasing, rather than decreasing. Local unions, however, received their mandated pay and pension increases in the last 3 years. Local budget hearings should be very interesting.

Fri, 09/24/2010 - 08:05 | 601863 old_turk

Leo,

This problem has been discussed in salons for years now (I remember discussing it back in college in the 70's and wrote a paper on it.)

The kicking of the can down the road will continue untile said can falls off the cliff!

Remember the 2nd rule of politics: "If you can't keep the promise, change the promise."

This will be the end-game. Change the promise. remember that plan we filed? Well, here's the new plan.

Fri, 09/24/2010 - 07:57 | 601854 Ancona

I have little to no faith in anything these "rating agencies" say any more. They were complicit in the financial meltdown, yet no one is in jail. Why anyone listens to them is a mystery to me.

Moody's Targeting Pension Woes?

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