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Illinois Credit Rating Lowered by S&P as Pension Costs Rise

Illinois had its debt rating cut one level to A- by Standard & Poor’s, which threatened to downgrade the state again following lawmakers’ failure to bolster the nation’s worst-funded pension system.

The rating action comes before the state’s planned sale next week of $500 million of general-obligation securities. The deal is still set for Jan. 30, Abdon Pallasch, Illinois’s assistant budget director, said in a telephone interview.

The move affects $26.6 billion of debt, according to Robin Prunty, an S&P analyst. It leaves Illinois’s bond grade six levels below AAA and ties it with California as S&P’s lowest- rated state. The combination of the pension burden and budgetary stresses may push Illinois closer to speculative grade, the company said.

“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,” Prunty, who’s based in New York, wrote in a report released today.

The state has the weakest pension system in the U.S., with 39 percent funding for five major groups of public employees, according to the Civic Federation, a Chicago-based nonprofit research group.

Session’s End

Lawmakers ended their session Jan. 8 without acting on measures to strengthen those funding levels. Illinois also has more than $9 billion of overdue bills to vendors, according to Judy Baar Topinka, the state’s comptroller.

“We’ve got to put on our seat belts here and understand the credit-rating agencies aren’t going to give us better marks until the legislature deals with” pension proposals, Governor Pat Quinn said today in Chicago before the downgrade.

The state’s $97 billion unfunded pension liability increases by $17 million each day.

The state’s fiscal struggles have yet to crimp demand for its debt.

Illinois bonds due in August 2022 traded yesterday with a yield of 2.92 percent, or 1.38 percentage points above benchmark munis, data compiled by Bloomberg show. The yield spread has narrowed from 1.73 percentage points when the bonds priced in May.

Moody’s Investors Service said today it kept Illinois at A2, one level higher than S&P’s grade, with a negative outlook.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net

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