CHICAGO — Moody's Investors Service on Thursday labeled the Illinois Supreme Court's voiding of the state's 2013 pension system overhaul a "credit negative" for the state's A3 bond rating.
Thursday's comment is not a rating action, but reflects Moody's consideration of the Supreme Court's ruling in its review of the state.
Moody's already assigned a negative outlook to Illinois.
In the first ratings fallout from the court's ruling, Moody's stripped Chicago of its investment grade rating on Tuesday and followed Wednesday by downgrading the Chicago Board of Education and Chicago Park District to speculative grade.
Those actions impacted $15.7 billion of debt.
"This development is credit negative for the state because the reforms would have reduced Illinois' reported pension liability by about $21 billion," Moody's wrote.
The agency's lead Illinois analyst is Edward "Ted" Hampton.
"Rejection of the pension benefit legislation puts the state under increased pressure to devise a way to pay for liabilities created through decades of insufficient contributions," the agency's comment said.
The reforms would have achieved the savings through cost-of-living adjustment cuts, caps on final salaries for benefit calculation and higher minimum retirement ages for some.
The court ruled that the cuts violated the state constitution's pension clause that affords pension benefits contractual rights against being impaired or diminished.
The justices rejected the state's argument that it could take the action based on its sovereign powers to act in a fiscal crisis to protect the public good.
Several new plans could be considered to deal with the state's massive unfunded pension liabilities.
Among them are Gov. Bruce Rauner's proposal to freeze accrued benefits and move employees into a new retirement plan with reduced benefits, which the governor believes could save $2.2 billion in the next budget.
Senate President John Cullerton, D-Chicago, is proposing an alternative that gives employees a choice going forward in how their pensionable salaries are calculated.
Even if Rauner's proposal passes it would be subject to litigation.
Moody's said the court's ruling Friday raises doubt Rauner's plan could be implemented.
During a legislative hearing Wednesday, Rauner administration officials said the governor will continue to press for the plan even though it's not yet in legislative form.
Its pension pressures could prompt Illinois to take other action for relief such as shifting the funding burden for teachers and public university employees to their employers, Moody's said in the comment.
Such a shift "would alleviate the pension burden on the state," but would pose a "negative for the credit standing of state universities and for many local governments, which would have to bear a much greater share of the employer contributions for their workers," Moody's said.
The state also could further cut spending and raise taxes, but Moody's expressed some doubt about its willingness and ability to do so.
"To date, the state has not tried to orchestrate a funding strategy that assumes it will need to satisfy the existing pension liabilities over an extended period," the comment said.
State lawmakers allowed a 2011 temporary income tax hike to partially expire Jan. 1.
Rauner has tied his support for any new revenues to legislative support for initiatives in his turnaround agenda, which the legislature's Democratic majority has resisted.
