CHICAGO - A decision to leave a temporary 2011 income tax hike in place, combined with recent pension overhaul legislation, would put Illinois in position to stabilize its deteriorated credit quality, Moody's Investors Service said in a new commentary.
"By keeping higher revenues flowing from temporary income tax hikes enacted in 2011 and by adopting substantial pension reforms, Illinois would likely stabilize its credit standing and halt a downward credit spiral," Moody's writes in a special credit focus commentary Monday. "Uncertainty, however, clouds the outlook for both the tax and pension policies."
Moody's also on Monday affirmed Illinois' A3 GO rating ahead of the state's sale of $750 million of GOs set for later in the week.
All three rating agencies assign A-minus level ratings to Illinois' general obligation bonds, the weakest among states. Fitch Ratings and Moody's assign a negative outlook while Standard & Poor's assigns a developing outlook.
Moody's' has downgraded the state five times since 2009.
Gov. Pat Quinn last month proposed making permanent temporary higher income tax rates approved in 2011. The higher rates began to expire midway through the next fiscal year on Jan. 1.
Leaving the current tax rates in place would preserve revenues that account for 5% of the state budget.
"Losing this revenue would exacerbate the state's credit challenges," which include unfunded pension obligations and a roughly $5 billion bill backlog, Moody's said.
The General Assembly's Democratic leadership has voiced support for Quinn's proposal but many lawmakers face re-election in November. The session is scheduled to end by the end of May. "We would view timely resolution as a credit-positive development," Moody's wrote.
Quinn in December signed into law a pension overhaul designed to stabilize a system saddled with $100.5 billion of unfunded obligations but unions have mounted a legal challenge that will decided by the Illinois Supreme Court. The overhaul would reduce annual contributions by 17% and trim 21% off the state's unfunded tab, Moody's said.
"The timing of court actions to approve or reject them remains unknown, leaving near-term pension uncertainties," analysts wrote. Moody's said it believes judges could approve the reforms despite strong constitutional protections of benefits. "One rationale for judicial approval could involve differentiating between accrued pension benefits and COLAs (cost-of-living adjustments)," Moody's wrote.
"We do not anticipate that lawmakers will be able to identify new pension funding or reform measures quickly, if the court rejects the law," Moody's wrote.
Moody's said it considers Quinn's budget proposal to bolster state reserves a positive although he has not released a specific proposal.
