UPDATE 1-Illinois pension reform could ease credit concerns-ratings

Wed Dec 4, 2013 12:04pm EST

CHICAGO Dec 4 (Reuters) - Credit ratings agencies said on Wednesday that Illinois' pension reform bill was a welcome development, though it is unclear whether it will improve the state's credit rating, which is the lowest among U.S. states.

Lawmakers in Illinois passed a pension reform bill on Tuesday to address a $100 billion unfunded liability, over the objections of public labor unions opposed to cuts in retirement benefits.

"Our immediate reaction is that it appears the state has done something pretty significant on the pension reform front," said Ted Hampton, an analyst at Moody's Investors Service, pointing to changes in cost-of-living adjustments for retirement payments, a 30-year funding plan and higher retirement ages.

But he added that Moody's needs to analyze actuarial data to determine how the bill will affect Illinois' A3 credit rating, which currently carries a negative outlook.

Fitch Ratings called the passage of the bill "a positive indication of the state's willingness to take action on this complicated issue after many failed attempts."

The credit agency, which rates Illinois A-minus with a negative outlook, said it will be analyzing the reforms to determine their outcome on pension funding levels and state pension contributions.

Standard & Poor's Ratings Services, which also rates Illinois A-minus with a negative outlook, will also be reviewing data for the reforms, said S&P analyst Robin Prunty.

"I think we certainly highlighted the need for pension reform as it relates to (Illinois') overall credit profile," she said.

The ratings agencies noted legal challenges to the pension changes were expected from the state's public labor unions, which strongly opposed the bill for breaching a state constitutional prohibition against diminishing retirement benefits for public workers.

Illinois Governor Pat Quinn is expected to sign the measure into law in the coming days, but it does not take effect until June 2014. Litigation could stall implementation of the reforms for months.

During Tuesday's debate on the bill, several lawmakers pointed out that Illinois has the lowest credit ratings among states due largely to its inability to rein in pension costs. Illinois has a nearly $100 billion unfunded pension liability, which the reforms hope to immediately trim by 20 percent. Bill supporters said the pension changes will save the state $160 billion over 30 years.

The credit cloud over the state has led investors to demand heftier yields for Illinois bonds. A planned sale of $350 million of taxable general obligation bonds by the state next week may show if the passage of pension reform has changed investors' view.