Illinois lawmakers let slip another chance to rescue the worst-funded U.S. state retirement system, wrapping up the legislative session without acting on the issue.
In failing to deal with a $97 billion unfunded pension liability, Illinois may face more credit-rating cuts. Its general-obligation debt is already the lowest-graded of any U.S. state. Yesterday was the third time since last year that lawmakers couldn’t reach agreement on a fix.
“Failure to pass pension reform underscores the state’s unwillingness to address its problems,” said Joseph Gankiewicz, a BlackRock Inc. (BLK:US) municipal-credit analyst, in a statement. “Investor patience may wear thin as the state has yet to make material progress in addressing pension reform, past-due bills and long-term budget sustainability.”
Negotiations stalled this time because House Speaker Michael Madigan and Senate President John Cullerton, both Chicago Democrats, couldn’t agree on how to restructure the retirement system. Deliberations were complicated by protections given to pension benefits by the state constitution. About an hour before the House session ended, Cullerton released a statement saying he wasn’t to blame.
“The Senate has worked to pass five different pieces of legislation designed to reform our systems within the confines of the constitution,” Cullerton said. “Not one of those plans was brought to the House floor for a vote.”
The retirement systems cover state workers, teachers, university employees, judges and lawmakers. Governor Pat Quinn, a Democrat, had preferred the House approach, wrapping fixes of all the plans into one measure.
“There is something wrong in Illinois when the speaker of the House and the president of the Senate could join together to propose a pension holiday for Chicago, yet they could not send a comprehensive pension reform bill to my desk,” Quinn said in a statement issued after the House adjourned. He referred to a bill to let the city skip two years of payments into its teacher pension fund, which didn’t pass.
“This is wrong,” the governor said of yesterday’s failure. “I will call the legislative leaders together in the coming week to forge a comprehensive pension-reform agreement.”
The state retirement system had about 43 percent of the assets needed to pay for projected obligations as of 2011, compared with a national median of about 72 percent, data compiled by Bloomberg show. The unfunded liability rises by $17 million with each passing day.
“Leaving here without doing anything would be the worst thing we could do,” Representative Jack Franks, a Woodstock Democrat, said before the final gavel fell in the House. “Personally, I’d be embarrassed.”
Cities, counties and school districts across Illinois face higher average borrowing costs than the other 18 states tracked by Bloomberg Fair-Value Indexes. Still, the yield penalty facing the state declined in recent weeks as investors in the $3.7 trillion market reacted to advancing pension bills and bet that a measure would reach the governor.
Taxable Illinois pension-obligation bonds maturing in June 2033 yielded 2.22 percentage points more than benchmark Treasuries yesterday, data compiled by Bloomberg show. That’s the smallest penalty since August 2011, when Standard & Poor’s rated the state two steps higher than its current A- grade.
Illinois debt rallied 0.45 percentage point through yesterday from May 2, when the House passed Madigan’s pension bill. Moody’s Investors Service grades Illinois general-obligation debt at A2, five steps below top-rated, while Standard & Poor’s gives it an A-, six levels lower that AAA.
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