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Illinois Becomes Moody’s Lowest-Rated State After Downgrade

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Jan. 6 (Bloomberg) -- Illinois had its general-obligation bond rating reduced by Moody’s Investors Service to A2 from A1, making it the company’s lowest-graded U.S. state.

The downgrade to the sixth-highest level came after a legislative session that “took no steps to implement lasting solutions to its severe pension under-funding or to its chronic bill payment delays,” Moody’s said in a report. Illinois, it said, has “weak management practices.”

Moody’s revised its outlook on the debt to stable from negative, citing the state’s power over revenue and spending, and laws that establish the priority of payment for general-obligation bonds. The downgrade affects $32 billion of debt, according to the statement.

“Although the state has taken positive steps toward fiscal stability, swift bipartisan action to implement further cost reductions and reforms in the upcoming legislative session are needed to stabilize the budget,” Kelly Kraft, a spokeswoman for Democratic Governor Pat Quinn, said in a statement.

The state’s unfunded pension liability in 2010 was $85 billion, and the system has assets to pay 45 percent of promised benefits, according to a study by Bloomberg Rankings. It is the lowest so-called funded ratio of any U.S. state.

‘Calculated Decision’

Last January, Illinois lawmakers approved record increases in personal and corporate-income taxes, generating about $7 billion in annual income. On Dec. 13, they approved breaks for CME Group Inc., which operates the Chicago Mercantile Exchange and Board of Trade; Chicago Board Options Exchange; and Sears Holdings Corp. after threats the companies might leave.

“The state had to make a calculated decision with respect to certain large employers,” Ted Hampton, a senior analyst at Moody’s who co-authored the report, said in a telephone interview. “Imposing tax increases is politically difficult.”

The higher levies addressed about half Illinois’s projected deficit. The state has about $7 billion in unpaid bills, and lawmakers rejected Quinn’s proposal in May to borrow to pay them. Quinn is to present his fiscal 2013 budget Feb. 22.

“Illinois leaders have a responsibility to hear the message being sent,” Republican Comptroller Judy Baar Topinka said in a statement. “The only way out of this mess is to keep cutting spending, provide for a better business climate and, for once, let growth outpace spending. ”

Looking to Sell

An Illinois general-obligation bond maturing in January 2015 traded yesterday at an average yield of 2.07 percent, according to Municipal Securities Rulemaking Board data compiled by Bloomberg. Similarly rated general-obligation debt maturing in three years yielded 1.44 percent, according to a Bloomberg Fair Value index.

Illinois, the fifth-most-populous U.S. state, plans to sell $800 million in taxable and tax-exempt general-obligation bonds as soon as Jan. 11. With the downgrade, Moody’s rates Illinois one step lower than California, at A1.

“There is no fear of the state missing a bond payment,” Topinka said in her statement. “The first payment we make each month is to our bondholders.”

Illinois still has an A+ rating from Standard & Poor’s, its fifth-highest. That’s two grades better than California, at A-.

S&P affirmed its rating, citing the “deep and diverse” Illinois economy that’s anchored by Chicago, the third-largest U.S. city, according to a statement.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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