Moody’s Investors Service called an Illinois judge’s dismissal of litigation challenging the state’s retiree healthcare reforms a credit positive for the state.

“The court’s order rejected challenges to recently enacted retiree health insurance reforms, a credit positive development that, if upheld, will help the state of Illinois reduce annual expenses and payment backlogs associated with retiree health benefits,” Moody’s wrote in its weekly credit outlook published Monday. The state is rated A2 with a negative outlook by the agency.

The state enacted legislation last year revamping its other post-employment benefits, forcing retirees to pay a greater share of the premium costs based on their income.

Four lawsuits were filed asserting that the changes violated provisions of the state constitution protecting pension benefits and granting them the status of an enforceable contract. The state countered that the constitutional protections did not protect OPEBs.

Sangamon County Circuit Court Judge Steven Nardulli sided with the state in tossing out the lawsuit March 19.

“Health insurance benefits are not guaranteed pension benefits protected by the Pension Protection Clause,” he concluded. “Plaintiffs do not have a vested contractual interest in free health insurance.”

Nardulli reasoned that a retiree’s health benefits are inherently variable, while pension benefits are similar to annuities, with fixed values based on such factors as final pay and years of service.

The subsidies carry a price tag of more than $877 million in the current fiscal year. Unfunded liabilities total about $33.3 billion. Officials estimate that the legislative changes could shave $9 billion off that figure. The state’s newly ratified union contract shaves $900 million off the state’s bill for retiree health care over its three-year term.

The Moody’s commentary also notes the potential impact of the ruling on state efforts to reform its pension system which is weighed down by $95 billion of unfunded obligations and annual payments that are growing by $1 billion annually.

State Senate President John Cullerton is pressing legislation that asks employees to shift to a plan with reduced benefits in exchange for preserving their retiree healthcare. He believes the voluntary shift is needed so as not to run afoul of state constitutional guarantees on pension benefits. “Although the circuit court’s ruling may be appealed, for now it suggests that this approach is legally viable,” Moody’s wrote.

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