CHICAGO - In Illinois' first credit review following the announcement that it faces an estimated $24.2 billion unfunded retiree health care liability, all three ratings affirmed the state's low to mid-double-A ratings this week in conjunction with a $125 million general obligation bond sale.
Citi won the bid on the competitive transaction yesterday with a true interest cost of 4.45%. Proceeds will finance various capital projects.
Fitch Ratings affirmed the state's AA credit with a negative outlook while Moody's Investors Service affirmed its Aa3 rating with a stable outlook. Standard & Poor's affirmed its AA with a stable outlook. The state carries nearly $19.4 billion of outstanding GO debt.
Although Fitch analysts have a negative view of the credit, they are waiting for the General Assembly to complete work on a fiscal 2009 budget before taking any action.
"Fitch will revisit the outlook and rating following decisions made in the 2009 budget and will assess the extent to which solutions address fiscal balance," analysts wrote.
The state's fiscal challenges include the growing strain posed by a $42 billion unfunded pension liability with payments growing over the next several years from $2 billion to $3.4 billion, a $750 million shortfall in the current fiscal 2008 budget and dwindling revenues amid a struggling national economy. The state also expects in the current fiscal year to fall to up to 70 days overdue on Medicaid bills from 61 days at the close of fiscal 2007.
Gov. Rod Blagojevich has proposed a series of measures that stand to impact the state's balance sheet. The governor has proposed issuing $16 billion of GO pension bonds to bring the funded ratio of the pension funds up to 75% from 62.6% - saving tens of billions in contributions over the next three decades. The additional GO debt, however, would raise the state's tax-supported debt levels to about 7.5% from 4.4% of personal income.
The governor has also proposed a $1.3 billion securitization of the state's share of national tobacco settlement payments or some other state revenue to fund an economic stimulus program. He also wants legislative approval for a partial privatization of the Illinois Lottery with $7 billion going to fund a capital budget in addition to $3.8 billion of new borrowing.
The state faces on ongoing budget gap, based on generally accepted accounting principles, of $2.4 billion for fiscal 2007 - although it's improved from a year earlier level of $3 billion. Analysts also recognize that the number is inflated by nearly half because the state's accounting method requires that special education appropriations be counted a year ahead.
In its favor is a reduced GO debt burden over the last several years, a diverse economy, improved revenue collections prior to the economic slump, and an improved general fund position. The state's cash reserves grew to $917 million at the close of fiscal 2007 compared to $866 million a year earlier.
Standard & Poor's analyst John Kenward said: "To sustain this rating level, the state must not only maintain balanced financial operations, but must also continue to make progress on increasing its cash reserves and lowering its GAAP general fund deficit and pension liability in a steady and significant manner."
Adding to its fiscal burdens, the state this week released a preliminary estimate of its accrued unfunded liability - $24.2 billion - for providing other post-employment benefits, largely health care-related, to retirees.
"This sum is large in absolute terms and significant particularly in view of the state's unfunded pension liabilities," Moody's wrote. However, it added that "liabilities for retiree health benefits are easier for states to reduce, through benefit plan modifications, than are liabilities for pensions."
Moody's also warned that the state faces some erosion in the favorable points it receives for financial reporting due to the lateness in approving a fiscal 2008 budget last summer and a delay in its release of comprehensive annual financial report for fiscal 2007.
