Illinois’ new pension law quickly found a fan club among Wall Street’s credit-rating agencies.
Standard & Poor’s, Moody’s and Fitch Ratings all issued statements praising the pension overhaul that Gov. Pat Quinn signed Dec. 5. It’s their first unanimously positive pronouncement in years about Illinois, and the accolades must have been music to Quinn’s ears.
If you read the agencies’ comments carefully, though, it’s clear that they consider the state’s finances far from fixed. They’re worried about a court challenge to the pension law, and they want to see updated actuarial projections to confirm that it reduces the state’s unfunded pension liability by $20 billion.
They’re also concerned about other fiscal challenges, such as $9 billion in unpaid bills and an income tax cut scheduled for Jan. 1, 2015.
S&P, for example, assigned Illinois a “developing” outlook, meaning that things could soon get better or worse. It sees a “profound and negative effect” if the pension law is overturned in court or if lawmakers fail to close the budget gap.
If that’s praise, it’s the faintest sort possible. “The rating agencies had been hammering on the politicians for two years for doing nothing,” says Ted Dabrowski, a vice president at the Illinois Policy Institute. “No matter what, I think they had to pat them on the back for doing something.”
That something was a compromise that raises the retirement age for some state workers, trims cost-of-living adjustments and, in exchange, reduces employee contributions. Sponsors say the unfunded pension liability will shrink to $80 billion from $100 billion.
Dabrowski quibbles with the numbers: He thinks updated estimates will push the liability closer to $90 billion. He also quibbles with calling this a pension fix.
“It doesn’t go far enough,” he says. “When the smoke clears, the unfunded liability will be no better than it was in 2011, when the rating agencies were already screaming about a pension crisis.”
He’s right: An $80 billion or $90 billion deficit is still a lot of money. But Laurence Msall, president of the Civic Federation and a longtime advocate of pension reform, is willing to declare victory.
“We’ve had more false starts on this issue than we’ve had starts,” Msall says. “This is a tremendously positive step in the right direction. It accomplishes a very important goal, which was to stop the deterioration of the state’s finances.”
Jeffrey Brown, a University of Illinois finance professor who has written about the need for pension reform, is unhappy about how that reform turned out. He says the changes disproportionately target high earners, including some university professors.
Brown estimates that younger professors might see their lifetime benefits reduced by two-thirds, and he says that’s a problem for a university that needs to attract the best and brightest.
“In higher education, we are competing with schools all over the world,” he says. “You can destroy a university pretty quickly if you start losing a lot of good people.”
Professors earning six figures, though, are never going to get a lot of sympathy in a political debate. To make cuts less painful for the majority of state employees, legislators will always be willing to sacrifice the pensions of high earners.
The bigger questions are whether the cuts will hold up in court and whether they will be deep enough to help the state’s dire budget situation. If the answer to either of those is “no,” the cheers from Illinois’ Wall Street fan club will turn to jeers overnight.
Read more at stltoday.com/nicklaus