Prairie State Wire

Illinois needs to keep the growth of its long-term liabilities within a range that it is able to pay, otherwise the state may not be able to weather the COVID-19 pandemic without its credit being damaged, according to a bond crediting business.

"The pandemic has eroded the state’s revenue, and its already massive long-term obligations – primarily pensions – are rising," Moody's Investors Service said in a news release from its website. "Nevertheless, Illinois’ credit position would stabilize if structural measures were implemented, while policies that achieve near-term balance by stoking growth in long-term liabilities would be a clear credit negative."

Having lower interest rates can help with the state's growth and credit. 

“Lower interest rates and weaker-than-expected investment returns will accelerate growth in Illinois’ extremely high pension liabilities while the state’s economic base is shrinking due to coronavirus-related business disruptions,” Moody’s analyst Ted Hampton said in the release. “We therefore expect Illinois to increasingly seek new revenue sources and to rein in spending, but any cuts to its pension contributions would only worsen its long-term fiscal position by adding to its unfunded liabilities.”

Moody's also noted in the release that the state's liability-to-GDP ration is the highest among the states.

If the U.S. does see an improvement in the economy later next year, this doesn't necessarily mean Illinois will be there with the rest of the nation. Illinois will likely have a higher debt burden, Hampton said. 

Liabilities are expected to increase to 45% of GDP by June 30, 2021. This is an increase from the 35% of fiscal year 2019. This would include an approximate 14% increase in bonds and a 34% increase in unfunded pension liabilities. 

"The rating agency also quashed the hopes of some Illinois activists who continue to pursue debt 're-amortization' as a way to kick the can," Wirepoints President Ted Dabrowski wrote in a post on its website. "Re-amortization of Illinois’ pension debt would push repayments further into the future, weakening the pension funds even more."

If cuts are made to pension contributions, it would negatively affect Illinois' long-term fiscal position. This would cause the state to rely on strategies that would create a negative credit for Illinois, such a deficit borrowing or "re-amortizing" pension contribution, according to Dabrowski.

“Contributing insufficient amounts annually to meet long-term benefit obligations is a short-term fiscal management tactic Illinois has used for years, and helps explain both the magnitude of the state’s pension problem and its credit standing,” Hampton said in the Moody's release. “Underfunding pensions again could lead to further credit deterioration, depending on the degree of underfunding, the state’s other financial strategies and the performance of its pension investments.”