State officials eye downgrade impact

SPRINGFIELD -- State finance officials spent Monday trying to sort out how the downgrade in the U.S. credit rating could affect Illinois.

Treasurer Dan Rutherford said investors on Monday were leaving the domestic stock market and buying up U.S. Treasury investments, which had the effect of driving down interest rates paid on them. Part of the treasurer's investment portfolio includes U.S. Treasuries.

"It absolutely will hurt our returns, but we don't know what the impact will be," Rutherford said. "In June of this year, we made $50 million worth of interest. We are nowhere near that going into August."

However, lower returns also extend to the other low-risk investments made by the treasurer's office, such as money markets and commercial paper. Rutherford said his priorities for investing state funds remains security and liquidity.

"The third priority is return," Rutherford said.

Many questions, few answers

Jim Muschinske, revenue manager for the General Assembly's Commission on Government Forecasting and Accountability, said it is too early to predict what the long-term implications for state government will be as a result of the downgrade.

"Everyone wants to get answers. There are more questions at this point," Muschinske said. "Things will just have to play out to see what ultimately will take place."

What could ultimately take place, though, are higher borrowing costs, both for consumers and the state, Muschinske said.

"The state could be affected, but to what magnitude there is no way of knowing," he said. "We might have to pay a higher interest (on bonds) to get people to buy."

Having to pay higher interest rates on future state bond issues - possibly ½ of 1 percent -- is a possibility, said Kelly Kraft, spokeswoman for Gov. Pat Quinn's Office of Management and Budget.

"However, at this time Illinois has not been downgraded, and we are not issuing bonds until September, which allows the market to digest the situation," Kraft said in a statement. "If we were downgraded as a result of S&P's downgrade of federal debt, the other 49 states would be downgraded as well. Therefore, until S&P indicates how states will be affected, offering more specifics on the ripple effect would not be prudent."

Kraft said the state expects to issue $2 billion to $3 billion in general obligation bonds in September.

If there is an impact from the downgrade on Illinois, Rutherford said, it is the similarity of the federal debt situation to Illinois' and how that might affect the state's bond rating. He said his office analysts believe "a significant" part of the state's rating is based on the size of the state's debt and ability to pay it.

Pension funds

For the state's pension funds, the impact of the downgrade was seen in the stock market plunge, which affects pension investments.

"It furthers the volatility in the marketplace and that's bad for all investors, including large institutional investors," said Dave Urbanek, spokesman for the Teachers Retirement System. "After the initial shock of (Monday), we have to see how things go. The downgrade has been symptomatic of what the markets have been looking at for the last three months."

TRS finished the last fiscal year with a 24 percent investment return. TRS's domestic stock investments were up 33 percent for the year, Urbanek said, although they dropped four-tenths of 1 percent in the last quarter. Earnings on international stocks similarly were good for the entire year, although returns were low in the last quarter.

"Since we diversify, as one sector goes down, another climbs as people look to minimize damage," Urbanek said. "We're looking to minimize whatever damage there might be. We don't look at it like we have to make short-term gains."

Bill Atwood, executive director of the Illinois Board of Investment, said the driving factor in the market drop is the economic situation globally, not just the credit downgrade.

"The downgrade is just S&P saying what everyone knows," Atwood said.

"The U.S. treasury as a credit is not as strong as several years ago. (But) it is still the safe harbor investment for the world. I don't know what is safer."

Doug Finke can be reached at (217) 788-1527.