Illinois Credit Rating Cut Over Pensions

Standard & Poor’s lowered Illinois credit rating over underfunded pensions, the Chicago Tribune reported yesterday. The real headline should have been: Illinois and other states are set to see cut after cut until you think the bleeding will go on forever. The Tribune wrote:

Standard & Poor’s downgraded the credit of the state of Illinois on Wednesday because of its weak funding levels for pensions, a move that could make it more expensive for the state to borrow money.S&P lowered its rating on Illinois to A from A-plus and said its outlook is “negative.”

The article does not comment on why S&P had Illinois at A-plus in the first place. It should have been downgraded long ago. But the rating agencies have gained a reputation for being a lagging indicator. Illinois will never be able to pay all the promises it has made to its unionized workers over the years. The article continues:

“The downgrade reflects the state’s weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Standard & Poor’s credit analyst Robin Prunty in a statement. “The downgrade also reflects continued financial weakness despite significant measures in the past two years to improve structural budget performance.”

Now here comes the key phrase that state-bond investors should pay particular attention to.

The negative outlook reflects the potential for further erosion of the state’s pension funds over the next two years ….

The rating agencies have finally come around to the realization that approximately $2.8 trillion worth of unfunded pension promises have effectively bankrupted many states.

Somebody isn’t going to get paid. Will it be retired state employees, or bond holders that have lent money to the states?

If the rating agencies really have zeroed in on the retirement liabilities facing the states, then rating cut after rating cut, as far as the eye can see, awaits many of America’s biggest states, including California and Illinois. It will be a never-ending cycle of cuts because America’s baby boomers are beginning to retire, leaving fewer taxpayers per retiree to make up the pension shortfalls. As the cuts come, it will become increasingly difficult for states to borrow money at affordable costs—putting further pressure on state finances.

Expect many more municipal and state defaults in the future. And expect higher taxes and fewer services and benefits. See: “Bankrupt U.S. Cities Indicate Nation’s Future.”