CHICAGO – Illinois' state capital took a two-notch credit blow over its pension woes.
Moody's Investors Service downgraded Springfield's general obligation rating to A3 from A1 and downgraded the city's senior lien water revenue debt to A1 from Aa2. At the lower levels, the ratings carry a stable outlook.
The GO downgrade "reflects considerable growth in Springfield's unfunded pension liabilities, which have significantly weakened the city's balance sheet," Moody's said Thursday. Springfield has a population of 116,250 and is 200 miles southwest of Chicago.
The city's adjusted net pension liability as calculated under Moody's formula rose 41% to $707 million in 2016.
Factors contributing to the growth include updated mortality assumptions, weak investment returns relative to assumed rates of return, and city contributions that, while closely conforming with actuarially determined contributions, were not sufficient to cover annual interest accruals on accumulated unfunded liabilities, Moody's said. New accounting standards also resulted in increased reporting of both assets and liabilities of the city's account with the Illinois Municipal Retirement Fund.
The city's reported unfunded other post-employment benefits liability as of February 29, 2016 was $431 million.
The city has seen steady but modest tax base growth but pressures are posed by the state's fiscal struggles as a political gridlock has stalled passage of full-year state budgets for fiscal 2016 and 2017.
"Springfield's tax base will likely remain a credit strength over the near term, but its role as the state capital of Illinois could introduce new economic challenges should the state's financial pressures persist and result in trimmed payrolls," Moody's wrote. Full valuation is at $6.8 billion.
The rating also considers the city's satisfactory financial operations despite limited available liquidity across operating funds, a large and stable tax base that benefits from the state's operational presence, and flexibility to raise revenue due to its home-rule status. The city budget relies on $117 million of operating revenue in 2016 and its fund balance as a percentage of revenues was at 18 %.
The water downgrade reflects the system's satisfactory financial profile that's balanced against its status as a city enterprise system which Moody's believes links its credit profile to that of the GO credit. The system benefits from the city council's unlimited rate setting authority and sound debt service coverage of 2.5 times.
The system is moderately sized and has a concentrated customer base supported by multiple institutional customers. It serves a population of 160,000 in central Illinois that includes eight communities surrounding Springfield, two water districts, and adjacent unincorporated areas.
Pension pressures abound across the state and high court rulings voiding any reforms that cut benefits have added to the state and municipalities' challenges in reining in costs. Chicago's pension tab has dragged its ratings down to a low of junk. Illinois' $113 billion unfunded tab has contributed heavily along with its budget deficit and political gridlock to its status as the lowest rated state.
