Illinois’ pension liability more than doubles under Moody’s new accounting rules

Moody’s is set to require states and local governments to use more transparent and realistic accounting rules when they report their true pension obligations. And that means Illinois’ debt and underfunding numbers will skyrocket.

Illinois’ credit rating, the equivalent of a person’s credit score, has been under pressure for several years. Concerned about the state’s poor governance and its out-of-control state pensions, the three major credit rating agencies have downgraded Illinois a total of 11 times since 2009, the year Gov. Pat Quinn took office.

As a result, Illinois now has the worst credit rating in the nation, according to the ratings of Standard and Poor’s Ratings Services and Moody’s Investors Service.

Unfortunately, Illinois’ credit picture is poised to get even worse.

Moody’s is set to require states and local governments to use more transparent and realistic accounting rules when they report their true pension obligations. And that means Illinois’ debt and underfunding numbers will skyrocket.

Because of its last-place credit rating, Illinois already pays the nation’s highest penalty rate when it borrows money. Nearly three times higher than California’s rate, that penalty reflects just how risky it has become to invest in Illinois.

Illinois’ fiscal crisis is a result of the state’s overspending, over-borrowing and its unwillingness to pass real reforms. Since 2008:

• The state’s unpaid bills have more than doubled to $10 billion.
• Its pension underfunding has risen by 80 percent to reach nearly $100 billion.
• The state borrowed more than $7 billion in fiscal years 2010 and 2011 to fund pensions.
• Quinn and the General Assembly hiked taxes on individuals and corporations by $7 billion, nearly all of which went to fund pensions in fiscal year 2012.

Moody’s change in methodology
Moody’s new methodology, which is being rolled out immediately, will expose the extent to which Illinois is an outlier when it comes to pension underfunding. Today, managers of Illinois’ pension systems optimistically assume they can earn more than 8 percent per year on investments. But the new rules will measure the pension plans on more realistic return assumptions: rates that currently are just over 4.3 percent. That change spells a significant jump in the state’s pension underfunding.

The Illinois Policy Institute recently calculated the new unfunded liability based on the proposed interest rate assumptions and found the state’s liability more than doubles to $209 billion.

Also, the new rules measuring the state’s pension fund assets will not be based on the state’s current methodology, which smooths out investment gains and losses over five years. Instead, it will measure assets at their market value on a particular valuation date.

Finally, the state’s net pension shortfall will be amortized over 20 years under a level-dollar method and not under the state’s current steep payment ramp that runs until 2045.

These changes will serve to reveal the true extent of Illinois’ dangerous debt levels, which must also include the state’s $54 billion in unfunded retiree health insurance obligations.

But states are not the only ones at risk. The credit situation of many municipalities will also get hit by Moody’s new rules.

Moody’s highlighted 29 cities across the nation that are under review, including Chicago, Evanston and Elk Grove Village.

Not everyone wants to accept the depth of Illinois’ crisis. But Moody’s new rules will make it increasingly difficult to avoid.