CHICAGO Standard & Poor’s shifted the outlook on its A-minus Illinois general obligation bond rating to “developing” from “negative” Tuesday following passage of a sweeping public pension restructuring, but warned the state is far from out of the woods fiscally.
Standard & Poor’s said a “developing” outlook indicates that the agency “could raise or lower the rating during the two-year outlook horizon” but said passage of the reforms represents a clear positive. The change is the first credit action on Illinois in recent memory that didn’t push its rating or outlook downward.
Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s all affirmed A-minus-level Illinois GO ratings ahead of a $350 million competitive sale of taxable GOs set for Thursday. The state has $27.5 billion of GO debt.
Fitch and Moody’s called Gov. Pat Quinn’s signing of a pension overhaul last week a positive step, but they are awaiting actuarial based analysis before incorporating the impact in the state’s credit profile. They retain negative outlooks.
Unions are also preparing a legal challenge to the benefit cuts, so it remains to be seen whether the changes approved in a bipartisan vote last week will take effect as scheduled next June.
Moody’s said based on its initial assessment the overhaul appears to stand out from other actions taken by states to rein their unfunded obligations. “Illinois’ reforms may be the largest reform package implemented by any U.S. state,” a special commentary issued this week read.
Backers say the plan will trim $160 billion off scheduled payments to the system, about $21 billion off $100.5 billion of unfunded liabilities, and $1.5 billion off upcoming annual state contributions
“The change reflects the consensus reached on pension reform, which we believe could contribute to a sustainable path to fiscal stability,” said Standard & Poor’s credit analyst Robin Prunty. “Although we view the consensus achieved by Illinois on this difficult issue as positive from a credit standpoint, the developing outlook reflects the implementation risk -- legal and budgetary -- associated with various provisions of the pension reform, as well as the overall structural budget challenges facing the state.”
State liquidity remains stressed as highlighted by a $5.8 billion bill backlog. Income tax revenues will drop in the coming years due to the partial expiration of a temporary personal and corporate income tax hike, unless lawmakers extend it or make it permanent.
If the courts uphold the reforms and lawmakers advance efforts to structurally balance the budget beginning in fiscal 2015 a higher rating would be warranted, Prunty wrote. But the credit could be strained again if the courts strike down the overhaul and no headway is made on the structural imbalance.
“While a developing outlook is unusual for a state, it reflects the magnitude and scope of pension and budgetary issues facing Illinois,” Prunty wrote.
Quinn called the outlook change a positive step and noted comments from the other rating agencies signaling their recognition. “As I’ve always made clear, one of the many reasons to resolve Illinois’ pension crisis was the negative impact it had on our bond rating, which cost taxpayers more money to finance critical repairs and improvements to roads, bridges and schools,” Quinn said.
“Despite expected court challenges, the law’s enactment is a positive event, because it starts the process needed to gauge the capacity for reforms in the context of legal protections for Illinois public pension benefits,” Moody’s wrote. The pension stalemate and huge bill backlog drove five Moody’s rating downgrades since early 2009.
Fitch called passage of pension reform legislation a positive indication of the state’s willingness to tackle the problem but cautioned that pensions are not Illinois’ only problem, as political attention now shifts to the expiring income tax hike. “Maintenance of the A-minus rating will require timely action in advance of the expiration of temporary tax increases in fiscal 2015. Deterioration in the state’s financial position, as evidenced by excessive use of non-recurring revenues or additional payment deferrals, would likely lead to a downgrade,” Fitch wrote.
