Illinois pension debt to double as new Moody’s methodology kicks in

Illinois Policy Institute –

It’s taken as fact that Illinois’ five state-run pension systems have a $100 billion funding shortfall. That’s what the official reports say.

But all that’s about to change.

Moody’s Investors Service is making good on its promise to evaluate state pension plans on more realistic assumptions. The rating agency has long critiqued the pension funds’ use of overly ambitious investment return targets that allow the funds to understate their true pension shortfalls.

That means Illinois’ total pension shortfall is set to double when Moody’s evaluates Illinois’ pension funds based on investment return targets that more properly reflect today’s market realities.

And what Moody’s says matters. Its evaluation of the state’s ability to repay its debt means a lot to the investors who lend billions to Illinois state government.

Moody’s has already downgraded Illinois five times in the past four years, and it rates the state’s credit the worst in the nation. Fitch Ratings and Standard & Poor’s Ratings Services, the other two major rating agencies, have also downgraded Illinois a combined total of eight times in that same period.

The state’s credit is just four notches away from reaching junk bond status. Any further downgrades mean the state is likely to face problems borrowing money.

New methodology ups Illinois 2011 pension debt by more than 60 percent

Moody’s new methodology was already at work when it downgraded Illinois debt to A3 from A2 on June 6, 2013. The rating agency cited that it had evaluated the state’s 2011 pension data and that its adjustments included “…a market-based discount rate to value the liabilities, rather than the long-term investment return used in reported figures.”

In 2011, Illinois’ state pension systems used an average expected return of more than 8 percent to value their funds, resulting in a funding shortfall of $83 billion.

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