Moody's Frowns on Potential Illinois Pension Payment Delays

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CHICAGO – Any delays in Illinois' monthly pension contributions pose a negative credit risk to the state, Moody's Investors Service said Friday.

The state is saddled with $113 billion of unfunded pension liabilities and a mounting bill backlog that stood at $9.6 billion Friday. The cash flow pressure from a prolonged budget impasse is straining the state's ability to meet payment demands.

The state warned in its most recent offering statement, deep in the section on pensions, that potential delays in the state's monthly pension contributions could increase bondholder risks. The state drew more attention to the warning last week in a supplement that expanded on the warning, highlighting that delays could force the system's funds to sell assets which in turn could further add to investor risks.

"Such delays, which would be credit negative, would most likely affect state contributions in November, when tax revenues are typically caught in a seasonal slowdown," Moody's said in its weekly outlook report. General fund revenues typically sag in October and November due to seasonal tax patterns. "Pension contributions are the state's primary source of budget stress."

State Comptroller Leslie Geissler Munger last year delayed the November contribution but made it up before the end of the fiscal year June 30 as allowed under statute. Monthly contributions don't fall into the comptroller's high priority list. Debt service, employee payroll, general aid to schools, and bills linked to federal funding enjoy top status.

"It is our intention to make November's payment," Munger spokesman Rich Carter said Friday.

When adjusted based on Moody's methodology, the state's net pension liabilities for its five plans totals $193 billion. The unfunded liability equals 437% of the state's own source revenues compared with a US median of 85%, Moody's said.

"Illinois' ANPL will keep rising because the state pays less than the 'tread-water' amount that covers current-year benefit accruals and interest on existing net liabilities," Moody's said. "Deferral of state contributions, and the possible resulting asset sales to pay retiree benefits, would likely exacerbate this trend."

To meet the "tread-water" level, the state would need to pay 44% more based on 2015 data, Moody's said. The state owes $7.9 billion in fiscal 2017 which began July 1. About $600 million of the $660 million monthly payment comes from the cash-strapped general fund. Contributions don't require that a budgeted appropriation is in place because they are made, like debt service payments, based on a continuing appropriation.

In the same supplemental notice to its offering statement, the state disclosed an arrangement to directly place $600 million of existing floating-rate debt with four banks next month ahead of expiring letters of credit that support the debt. The deal received a positive review from Moody's in its outlook report earlier in the week.

The state is rated Baa2 with a negative outlook. The Moody's commentaries don't affect the rating or outlook.

Illinois will return to the market next month with a $480 competitive new-money deal that had been expected this week. Illinois paid higher yield penalties on the recent refunding deal amid a tide of negative fiscal and market headwinds.

S&P Global Ratings downgraded Illinois ahead of the sale to BBB, leaving its outlook at negative. Fitch Ratings affirmed its BBB-plus rating and left the credit on negative watch. Fitch will resolve the placement in January after lawmakers return for a post-election, lame-duck session to tackle a budget plan and pension reforms.

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