CHICAGO — Illinois Gov. Pat Quinn Thursday said he is hoping rating agencies look favorably on pension reform legislation approved this week as the state seeks to fend off any further downgrades and improve its market image with three sales of $1.3 billion of general obligation bonds planned over the next month.

The reforms — which affect future employees — are estimated to save between $300 million and as much as $1 billion in fiscal 2011, and more than $100 billion through 2045 when the state is required to bring its pension funds up to a 90% funded ratio. The state closed fiscal 2009 with a $62.4 billion unfunded liability in its four retirement funds, a 51% funded ratio.

All three rating agencies cite the size of the unfunded liabilities and the strain of growing payments on the state’s balance sheet as a negative in their assessment of the state’s creditworthiness, so any reduction in the size of the liability would likely be viewed positively.

The near-term savings will only slightly chip away at a nearly $13 billion budget deficit. But Quinn and his finance team are hoping rating agencies will look at lawmakers’ willingness, finally, to take some action with long-term fiscal significance as a sign that the state is ready to take on its structural problems.

The rating agencies “made it pretty clear that our public pension issues had to be addressed,” Quinn said at a news conference yesterday, one day after the General Assembly moved swiftly to approve the pension reforms. “This very important, historic step will hopefully be recognized by those that look at our bond rating.”

The governor’s proposed fiscal 2011 budget relied on $300 million in savings from some form of pension reforms.

Illinois’ $23 billion of outstanding GOs are rated A by Fitch Ratings, which has the credit on negative watch; A2 by Moody’s Investors Service, which assigns a negative outlook; and A-plus by Standard & Poor’s, which also assigns a negative outlook. In addition to its budget deficit and mammoth pension liabilities, the state faces a liquidity crisis with $5 billion in overdue bills.

“The negative watch …will be resolved after an assessment of the extent to which the state addresses its funding imbalances in the context of the legislative session that begins in February,” Fitch analysts wrote before the session began.

“The absence of recurring solutions in the next year to deal with the current budget challenges and begin to stabilize liquidity will likely result in a further downgrade of Illinois,” Standard & Poor’s has warned.

“Failure to enact corrective fiscal measures in coming months will exacerbate the state’s structural gap going into fiscal 2011 and place downward pressure on the state’s ratings,” Moody’s advised.

State debt manager John Sinsheimer said he’s been in constant contact with the rating agencies in recent days to keep them informed of the legislative action, but he did not want to speculate on what action analysts might take.

The state’s three bond sales include the competitive issue on April 1 of $250 million of GOs that mature March 31, 2011. Public Resources Advisory Group is financial adviser and Foley & Lardner LLP is bond counsel. The financing is aimed at both paying down a backlog of overdue Medicaid bills and at leveraging an additional $400 million in federal matching dollars.

Illinois on April 6 will take competitive bids on $356 million of new-money GOs, including $300 million of taxable Build America Bonds and $56 million of non-BAB taxable GOs. The bonds will mature serially between 2011 and 2035 with a make-whole call provision. Bidders have the option of converting up to five maturities to one or two term bonds. First Southwest Co. is financial adviser and Mayer Brown LLP is bond counsel.

Proceeds will finance school construction grants included in the capital budget approved last year by lawmakers. State debt statutes require Illinois to sell at least 25% of its issuance in any fiscal year competitively.

Illinois will then enter the market April 20 with an additional $700 million of 25-year GO BABs. William Blair & Co. is senior manager and First Southwest is advising. Proceeds will finance transportation, transit, commuter, and high-speed rail projects.

The $356 million sale was initially scheduled for March 11, and the larger sale a week later, but Sinsheimer said they were postponed due to the release of the budget on March 10. “We delayed them to give the market time to review and digest the state budget,” he said.

The legislation, sponsored by House Speaker Michael Madigan, D-Chicago, was sprung on lawmakers on Wednesday and moved quickly through committee and onto the House floor where it advanced with Democratic and some Republican support. The Senate late Wednesday then approved the legislation, giving unions little time to lobby lawmakers to reject it.

Under the legislation, the state will shift to a two-tiered system with benefits reduced for future employees. The legislation requires future employees be at least 67 years old with 10 years of state employment to qualify for full benefits, and it caps the salary at which benefits are determined. It requires the highest average salary to be determined by reviewing a longer period and employees would not longer be able to draw pension from one system if working in a full-time job covered by another system.

The reforms impact a total of 13 pension systems, including the state’s systems and those of some Chicago and Cook County workers. The plan also trims $1.2 billion off the amount Chicago Public Schools owes for its teachers’ pensions over the next three years and extends by 14 years the term during which CPS must bring its funding ratio to 90 %. The district faces a $900 million deficit in its next budget.

The pension reforms could also help lay the groundwork for a 1% increase in the individual income tax Quinn is seeking. Yesterday he said taxpayers need to see the state is tightening its belt before it seeks any revenue increases.

Quinn’s proposed $52 billion budget includes $2.4 billion in cuts, relies on $4.7 billion in deficit borrowing, and leaves nearly $6 billion in bills unpaid. A 1% income tax hike could generate up to $3 billion that would help reduce the amount of unpaid bills and restore $1.3 billion in proposed education cuts.

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