Moody’s Investor Service said in an announcement released Monday the [Sangamon County judicial ruling on pension reform], if upheld, would speed the growth of debt for one of one of the worst-funded pension systems in the nation.
“The state’s negative outlook indicates the possibility that factors such as further growth in the state’s pension liability will drive the rating lower still,” Moody’s stated.
Standard & Poor’s Rating Services said last week’s ruling would have no short-term effect as savings from pension reform were not included the fiscal year ended July 1, 2015.
“We will continue to monitor the legal process relating to pension legislation,” S&P stated.
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Fitch Ratings also said it had not factored in savings from the pension reforms in its rating assessment due to the legal challenge that was always expected to go to the state’s high court and state’s decision not to incorporate savings in fiscal 2015. “The ruling is not an immediate credit concern,” said analyst Karen Krop. “The state’s budget is a more immediate concern.” The state’s fiscal 2015 relies on one-shots and falls to cover a full year’s spending demands as lawmakers failed to approve an extension of the 2011 income tax rates that partially expire Jan. 1
“While maybe this ruling was to be expected, the bigger thing is going to be the temporary income-tax hike,” said Adam Buchanan, vice president of sales and trading at Ziegler, a broker-dealer in Chicago. “That, coupled with these pension issues, is really going to put some downward pressure on the rating.”
For now, rating companies want to see how the state will act. Standard & Poor’s said in a report after the pension ruling that it will maintain its A- rating and negative outlook on Illinois because the grade already incorporated legal hurdles. Karen Krop, an analyst at Fitch Ratings in New York, said this month that Rauner needs a chance to present his plan.
Illinois hasn’t issued general-obligation bonds since April, when it capitalized on a rally following the December passage of the pension measure to lock in borrowing costs close to the lowest since 2009.
Illinois’s yield spread to benchmark munis has shrunk since August as money pours into the $3.7 trillion market. Individuals have added to muni mutual funds for 19 straight weeks, the longest stretch since 2012, Lipper US Fund Flows data show.
More roller coasters ahead, campers.