Standard & Poor's Ratings Services has placed its 'A-' GO rating, 'BBB+' appropriation-backed rating, and 'BBB-' moral obligation rating on the State of Illinois on CreditWatch with negative implications following the Illinois Supreme Court's ruling that struck down the pension reform legislation the state legislature passed in 2013. In its decision, the Supreme Court affirmed the Circuit Court's decision declaring Public Act 98-599 to be unconstitutional and enjoining its enforcement.
This decision, coupled with the implementation risk of the current fiscal 2016 budget proposal and a second round of pension reform introduced by the governor, underscores the profound credit challenges facing the state from a budget and liability standpoint.
"In our view, the Supreme Court ruling, along with the earlier ruling on other postemployment benefits, casts doubt on future pension and OPEB reform initiatives," said Standard & Poor's credit analyst John Sugden. It also underscores our credit focus on the sustainability of the current pension systems and the state budget's ability to absorb the future servicing costs.
We expect to resolve the CreditWatch within three months, with our primary focus on the current legislative session and deliberations relating to a fiscal 2016 budget. We believe from a credit standpoint the ruling has negative short- and long-term implications. Absent a credible budget for fiscal 2016 that has structural alignment of revenues and expenditures, we would lower our rating on Illinois to the 'BBB' category. The magnitude of any downgrade will be based on the 2016 budget condition and our assessment of liquidity and payables.
