CHICAGO – The pension burden faced by Springfield, the Illinois state capital, is weighing on its credit.
Moody’s Investors Service late last week shifted its outlook to negative from stable on Springfield’s A3 general obligation rating.
“The negative outlook reflects the expectation that, absent considerable budgetary adjustments that support higher pension contributions, the city's already high post-employment benefit burden will continue to grow,” Moody’s wrote. “Growth in that burden would signal the need for much higher pension contributions, which could ultimately stress the city's healthy liquidity.”
The A3 rating also reflects elevated fixed costs that will need to increase in order to address the retirement burden, a large tax base that serves as the state capital, broad legal flexibility to raise local revenue, stable operating reserve balance and ample liquidity across governmental funds, Moody’s said.
Weak growth or contraction in the city's tax and revenue base that exacerbates long-term liability and fixed cost burdens and continued growth in unfunded post-employment and annual pension contributions that presents heightened budgetary challenges could lead to a downgrade.
The rating action is the latest example of the pension strains facing many local governments in Illinois as well as the state. Moody’s last year downgraded 15% of the Illinois cities it rates with pensions as a primary factor behind the action.
Springfield, with a population of 116,250, is about 200 miles southwest of Chicago.
Moody's also affirmed its A1 rating on Springfield’s $80.5 million of water revenue debt and revised the outlook to negative. A long-term trend of declining water usage is a credit challenge. The negative outlook reflects the credit profile of the water system as business enterprises of Springfield which links it to the city’s GO profile.
The water rating could be cut is the city’s rating is lowered, there is a weakening of debt service coverage or system liquidity, and there is an increase in the system’s debt burden. Springfield's water revenue bonds are secured by a senior lien on the net revenues of the city's water enterprise.