Illinois Debt Cut by S&P After No Action on Pension Funding

Illinois Debt Cut by S&P After No Action on Pension Funding
Governor Pat Quinn said today he is inviting legislative leaders to meet in early September to work on pension changes. Photographer: Saul Loeb/AFP via Bloomberg

Illinois, the U.S. state with the worst-funded pension system, had the rating on its general-obligation debt cut one level by Standard & Poor’s and may face more downgrades.

The change to an A rating followed state lawmakers’ failure to agree to reduce retirement costs during a special session Aug. 17. The outlook for the state’s debt, which now has S&P’s sixth-highest grade, is negative. California, with an A-ranking, one level below Illinois, remains S&P’s lowest-rated state.

Illinois has an unfunded pension liability of at least $83 billion, according to state figures. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states, data compiled by Bloomberg show.

“The downgrade reflects the state’s weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Robin Prunty, an S&P analyst, in a report today.

Governor Pat Quinn said today he is inviting legislative leaders to meet in early September to work on pension changes. Lawmakers have considered boosting employee contributions, passing some costs to local school districts and forcing workers to choose between the current system and receiving free retirement health care.

No Surprise

Quinn, a Democrat, said the rating cut wasn’t a surprise.

Erasing the fifth-most populous state’s unfunded pension liability “is vital to getting our financial house in order,” Quinn said in a statement. “Today’s action by Standard & Poor’ is more evidence that we must act.”

Illinois had about $28 billion of general-obligation debt as of May 8, according to bond documents. The state of about 13 million people plans to sell $50 million of debt next month for technology projects, John Sinsheimer, the state’s director of capital markets, said in an interview.

Taxpayers will pay more to issue debt because of the lower rating, state Treasurer Dan Rutherford said in a statement.

“I urge the legislature to act decisively towards comprehensive, constitutional and fair pension reforms that will reverse this situation,” he said.

Investors have been unfazed by the state’s fiscal strains. Yields on 10-year debt sold by Illinois and its localities are 1.45 percentage points above those on top-rated municipals with a similar maturity, data compiled by Bloomberg show. That’s the least extra yield since February 2011.

Bond Returns

Illinois state and local debt has returned about 7.1 percent this year, including price gains and interest, compared with 5.9 percent for the $3.7 trillion municipal-securities market, according to S&P index data.

Among the 26 states and Puerto Rico covered by the S&P indexes, only Ohio and Colorado, which each returned about 7.2 percent, beat Illinois.

S&P assigned a negative outlook for the state because of possible additional “erosion” of Illinois’s pension funds during the next two years. Individual and corporate tax increases will expire on Jan. 1, 2015, which may weaken financial operating results, S&P said.

The Legislature in January 2011 approved a 67 percent personal-income tax increase and a 46 percent boost in business-income tax to produce about $6.8 billion annually, according to the Governor’s Office of Management and Budget.

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