It was refreshing to read Don Harmon's One View in last week's Wednesday Journal [Pension reform is on its way, Viewoints, March 13]. I believe Don is highly committed to making a difference and bringing the concept of pension reform to reality.
However, the damage that has already been done to the state is undeniable. As a result of the lack of confidence in the state's ability to pay its obligations, Illinois is paying an enormous premium to borrow money. The added interest cost is a clear result of the intrinsic risk associated with holding our debt instruments. Investors simply demand a higher rate of return to compensate them for holding an investment that is perceived as carrying a higher likelihood of failure. While rating agencies are important in analyzing and communicating this risk, the capital markets themselves are the ultimate arbiter of what premiums are assigned to a given investment. (By the way, few economists believe that rating agencies triggered the mortgage crisis, the recession or the housing crisis. It is generally understood that those events were caused by a relaxation of lending standards, lack of regulation in the derivative markets and an overly accommodating Federal Reserve).
This past Monday, the Securities and Exchange Commission announced a settlement of a lawsuit against the State of Illinois that accused it of misleading investors regarding the health of its pensions. Specifically, the SEC said, "The state did not inform investors that rising pension costs could continue to affect its ability to satisfy its commitments in the future." The SEC was essentially saying that the state had knowingly been underestimating the risk associated with investing in its bonds — the exact opposite of what Don accused the rating agencies of doing.
Being charged with securities fraud by the SEC is just another sordid chapter in the history of our state. But it's abundantly clear that the risk associated with holding bonds issued by the state of Illinois is not small. In fact, it becomes higher and more costly every day pension reform is delayed.
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