* We’re getting dangerously close to junk bond status, campers, but we’re not there yet. From a press release…
Standard & Poor’s Ratings Services lowered its rating on Illinois’ general obligation (GO) bonds to ‘A-’ from ‘A’. At the same time, Standard & Poor’s assigned its ‘A-’ rating to the state’s $500 million GO bonds of February 2013. The outlook is negative.
“The downgrade reflects what we view as the state’s weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Standard & Poor’s credit analyst Robin Prunty.
The aggregate pension funded ratios on an actuarial basis declined to 40.4% at fiscal year-end 2012, compared with 43.4% in fiscal 2011. Based on the state’s current projections, the funded ratio will decline further to 39% in fiscal 2013. The continued decline in pension funded ratios is due in part to contributions below the annual required contribution, investment returns below assumptions, and lower investment return assumptions. While legislative action on pension reform could occur during the current legislative session and various bills have been filed, we believe that legislative consensus on reform will be difficult to achieve given the poor track record in the past two years. If there is meaningful legislative action on reform, we believe that there could be implementation risk based on the potential for legal challenges, and it could be several years before reform translates into improved funded ratios and budget relief. In addition, Illinois has to manage other challenges, which include pending statutory reduction of rates on the personal and corporate income taxes beginning in fiscal 2015 and a high level of accumulated payables, combined with the more typical pressures facing the state sector in terms of a slow economic recovery, potential federal fiscal consolidation, and health care reform implementation. […]
Offsetting these generally positive credit factors are what we consider:
· Sizable budget-based deficits for fiscal years 2009 through 2012 despite revenue-enhancement measures implemented in 2011 that we view as significant;
· A historically large generally accepted accounting principles general fund balance deficit;
· Large unfunded actuarial accrued liability (UAAL) for its five pensions; and
· A moderately high and growing debt burden due to debt issuance for current pension contributions in fiscal years 2010 and 2011, and the approved long-term capital program.
The negative outlook reflects what we view as the range of challenges Illinois faces that will require legislative consensus and action. We believe the outcome of deliberations relating to pension reform and the expiration of current personal and corporate income tax rate increases on Jan. 1, 2015, along with other normal budget pressures, could have a profound effect on the state’s budgetary performance and liquidity over the two-year outlook horizon. While it is unusual for a state rating to fall into the ‘BBB’ category, lack of action on pension reform and upcoming budget challenges could result in further credit deterioration, particularly if it translates into weaker liquidity. We could revise the outlook to stable if Illinois achieves pension reform that lowers liabilities and associated costs to the state and takes credible actions to achieve structural budget balance over the two-year outlook horizon. We believe there is limited upside potential for the rating in the next two years given the size of the accumulated deficit and the liability challenges Illinois faces but will evaluate the state’s progress in addressing key budget and pension challenges. [Emphasis added.]
*** UPDATE *** Gov. Quinn was asked about pension reform today. His response…
“The pressure is higher than ever … We’ve got to have an urgent approach,” Governor Quinn said. Referring to State Senate President John Cullerton’s Senate Bill 1, which incorporates suggestions from Democrats, Republicans and labor unions for a multi-pronged approach to tackling the pension problem, he continued: “We’ve got to all work together in a bipartisan way to get this challenge of pension reform behind us … We’ve got to put our seat-belts on here, and understand the rating agencies won’t give us better marks until the legislature passes Senate Bill 1 and gets the job done. That’s really the message the credit rating agencies are screaming at the top of their voice. I’ve heard it, and I think the members of the legislature need to hear it as well.”
*** UPDATE 2 *** President Cullerton…
“The rating agencies are confirming what we all recognize. It’s time for action on pensions. The Senate President will continue to push constitutional reforms to stabilize our pension systems and restore confidence in the state of Illinois.”
*** UPDATE 3 *** Leader Cross…
“S&P’s downgrade of our bond rating – coming on the heels of Fitch’s announcement just two weeks ago – is another indication of the gravity of Illinois’ fiscal crisis. We simply cannot afford continued downgrades at a time when we urgently need to restore stability and balance to the state’s fiscal climate. The General Assembly must act in order to avoid further damage to our credit rating by achieving consensus on meaningful pension reform that can pass the House and Senate this spring.”