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S&P: Illinois’ long term debt obligations won’t be solved by short term increased economic activity

Illinois News Network (IPI)

Friday, January 12, 2018  |  Article  |  By Greg Bishop

Bonds, Bonding, Borrowing, Debt, Credit Rating , Budget--State (8) , Medicaid, Managed Care
While state coffers may reap the reward of increased tax revenues from expected economic expansion in the short term, a ratings agency warns Illinois’ long-term liabilities are a growing concern.

A new S&P report forecasting the state sector says federal tax reform is expected to increase economic activity in the short term, but S&P Managing Director and lead credit analyst Gabe Petek said there are risks that states must address, like high public sector pension debt and high Medicaid costs.

“All of the risks that we talk about in the state sector outlook, to a significant extent, Illinois embodies all of them in sort of the strong form,” Petek said.

Illinois’ unfunded pension liability is the highest in the country at $130 billion. Adding post-employment benefits taxpayers are on the hook for makes that debt top out at more than $200 billion.

Then there are signals from Congress to pull back on some Medicaid costs.

“States are obliged to pick up that share,” Petek said.

Petek’s report also said with the health insurance mandate coming to an end, there could be up to 5 million fewer people enrolled in Medicaid across the country, reducing expected expenditures for the states. But that still won’t diminish Illinois’ massive debt obligations.

“It really means that other state services are going to be crowded out of the budget,” Petek said.

Even with expected increased revenues, Petek said other Illinois programs likely will take a hit to make up for the fixed costs.

“These are things like higher education funding or infrastructure spending,” Petek said. “[There are] items in the budget that my not be mandatory in a legal sense but certainly are important for any state’s longer-term economic prospects.”

Another problem Illinois embodies, Petek said, is the ongoing partisan budget battles the state has endured, “which can make it hard to enact prudent fiscal policy. So that’s a challenge that we see for the state of Illinois.”

Petek said 30 percent of Illinois’ budget is eaten up by debt service, public sector pensions and post employment benefits. He said the ratings agencies are watching Illinois closely.