* Illinois rated lowest among 50 states by Moody's and S&P
* Public pensions unfunded liabilities at $96.8 billion
* $500 mln bond sale on Wednesday
CHICAGO, Jan 25 Illinois' credit rating took
another tumble on Friday as Standard & Poor's Ratings Services
pushed it down to the lowest level among all states and said it
could fall further.
The one-notch downgrade to A-minus affects $26.6 billion of
outstanding general obligation debt and marks the second in five
months by S&P, which had lowered Illinois to A from A-plus in
August. The rating agency also placed a negative outlook on the
lower rating, saying legislative consensus and action would be
needed to tackle the state's huge unfunded public pension
"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," S&P said
in a report.
The legislature and Governor Pat Quinn have failed to reach
a consensus on any measure to tackle the $96.8 billion unfunded
pension liability, most recently during a lame-duck session that
ended Jan. 8.
S&P cited Illinois' lower pension funded ratios and lack of
action on pension reforms for the latest downgrade, pointing out
that a legislative consensus on reforms will be difficult to
achieve as a deal has eluded the state over the past couple of
Even if reforms are enacted there is the potential of
lengthy legal challenges, the rating agency added.
State labor union officials have said they will go to court
to fight pension changes and they are confident they will
prevail given strong protections for pension benefits in the
"It could be awhile before (the state sees) any meaningful
reduction in liability or budget relief," said Robin Prunty, an
Leaders of the Democrat-controlled legislature called for
action in the wake of the latest downgrade, although it was
unclear if any of the pension reform bills introduced in the new
session that began Jan. 9 has enough support to pass.
"The General Assembly must act in order to avoid further
damage to our credit rating by achieving consensus on meaningful
pension reform that can pass the House and Senate this spring,"
said House Republican Leader Tom Cross in a statement.
A spokeswoman for Senate President John Cullerton, a
Democrat, said he will continue "to push constitutional reforms
to stabilize our pension systems and restore confidence in the
state of Illinois."
S&P's action came ahead of the sale of $500 million of
Illinois general obligation bonds on Wednesday. While the state
has had no problem selling its bonds in the $3.7 trillion
municipal bond market, investors are demanding fatter yields for
taking on the riskier credit.
"The market has been saying they believe in the state and
its general obligation pledge and believe in its ability to
pay," said Richard Ciccarone, managing director and chief
research officer at McDonnell Investment Management.
But he warned that investor interest could fall off if
Illinois' ratings slip into the less desirous BBB-category,
raising the state's borrowing costs even more.
With the downgrade to A-minus, Illinois joins California in
having the lowest rating among states S&P rates, although
California's outlook is positive.
Illinois' A2 rating with a negative outlook from Moody's
Investors Service is the lowest state rating from that credit
agency. Earlier this month, Fitch Ratings put Illinois on a
watch list for a potential downgrade of its A rating over the
next six months.
A drop into the BBB category would keep Illinois just above
the BB category, where debt is considered junk.
S&P said an upgrade for the state was highly unlikely.
"We believe there is limited upside potential for the rating
in the next two years given the size of the accumulated deficit
and the liability challenges Illinois faces but will evaluate
the state's progress in addressing key budget and pension
challenges," the rating agency said.
An Illinois legislative commission reported in November that
the state's unfunded pension liability jumped to $96.8 billion
at the end of fiscal 2012, up from $83 billion in fiscal 2011.
The funded ratio, which was already the lowest among states,
fell to 39 percent from 43.3 percent.