Illinois' inaction on pensions in rating agency crosshairs

Reuters News
Posted: Aug 21, 2012 1:35 PM
Illinois' inaction on pensions in rating agency crosshairs

By Karen Pierog

CHICAGO (Reuters) - Illinois lawmakers' inability to reform a woefully underfunded public retirement system at a special session last Friday is likely to weigh on the state's already relatively low credit ratings.

"We are in the process of reviewing the total credit picture, including the budget, pensions, etc," Standard & Poor's Ratings Services analyst Robin Prunty said on Tuesday.

"But certainly, the lack of action on pensions is not a credit positive."

She added that the likelihood for action by the state in the remainder of the year will also be a factor.

Many U.S. states are struggling with soaring pension costs and most have implemented some reforms. In Illinois, pension problems are pushing the state's weak finances to the edge.

S&P, which rates Illinois A-plus with a negative outlook, put the state on notice in March that it could face a multiple-notch general obligation rating downgrade if there is no "credible progress" in taming its huge $83 billion unfunded pension liability and on tackling a structural budget imbalance.

While the state enacted a $33.7 billion, fiscal 2013 budget that included Medicaid reforms and spending cuts, the Democrat-controlled General Assembly adjourned its spring session on May 31 without a pension fix.

Governor Pat Quinn, a Democrat, called lawmakers back into a special session last Friday that also produced no solution for the worst-funded state pension system in the United States amid political squabbling and labor protests.

Quinn has repeatedly warned that the lack of pension reform was imperiling Illinois credit ratings and he said on Friday he will be launching a grass-roots campaign with taxpayers and the business community to press for legislative action.

Ted Hampton, an analyst at Moody's Investors Service, which downgraded Illinois to A2 from A1 earlier this year, declined to comment specifically on the unsuccessful special session. But he noted that Illinois' pension obligation has been a factor in downgrades and other negative rating actions in recent years.

"When we lowered the rating in January we definitely factored in pensions as a very serious challenge for the state and that identifying and implementing a complex solution would not be an easy lift," Hampton said on Tuesday.

Illinois' A2 GO rating with a stable outlook is the lowest among the states Moody's rates, while S&P rates only California, at A-minus with a positive outlook, lower than Illinois. An analyst at Fitch Ratings, which rates Illinois at A with a stable outlook, had no immediate comment on the state's pension situation.

Illinois and California have had their share of financial problems that were exacerbated by the economic recession and housing market collapse. And both states are big issuers of debt in the $3.7 trillion U.S. municipal bond market.

Investors are demanding higher yields to invest in Illinois' bonds as its so-called credit spread over Municipal Market Data's benchmark triple-A scale for 10-year debt is the widest at 157 basis points among major U.S. city and state debt issuers tracked by MMD, a unit of Thomson Reuters. California's spread by comparison is less than half of Illinois' at 66 basis points.

(Reporting By Karen Pierog; Editing by M.D. Golan)