By Karen Pierog
CHICAGO, June 3 Illinois' lowest-among-states
credit rating took a new hit on Monday as Fitch Ratings
downgraded the state just days after Illinois lawmakers left the
state capitol last week without addressing a huge public pension
"Fitch believes that the burden of large unfunded pension
liabilities and growing annual pension expenses is
unsustainable," the rating agency said in a statement.
It said the failure to achieve reform measures despite the
substantial focus on the topic exacerbates concerns about
management's willingness and ability to address the state's
"numerous fiscal challenges."
The state's general obligation rating was cut a notch to
A-minus with a negative outlook, affecting $27.5 billion of
outstanding debt. Illinois, which had been expected to sell up
to $1 billion of GO bonds as soon as this month, likely would
need to offer a higher interest rate on its securities because
of the downgrade.
Fitch also warned that Illinois' lower rating could be in
further jeopardy if the state does not take action to stabilize
its finances ahead of the planned partial rollback in 2015 of
big income tax rate increases enacted in 2011.
"Deterioration in the state's financial position, as
evidenced by excessive use of non-recurring revenues or
additional payment deferrals would likely lead to a negative
rating action," Fitch said.
Illinois is alone among states in the scope of its use of
delayed payments of bills and other obligations as a
Even before the Fitch downgrade, Illinois had the lowest
credit ratings among U.S. states as the state struggled with a
nearly $100 billion unfunded pension liability caused by years
of skipping or skimping on payments to its five retirement
systems. Those payments are rising, threatening funding for
core state services such as education and health care.
GOVERNOR NOT SURPRISED
Governor Pat Quinn said he was not surprised by the rating
"Every time the General Assembly misses the deadline,
Illinois' credit rating is downgraded, which hurts our economy,
wastes taxpayer dollars and short-changes the education of our
children," he said in a statement, adding that he planned to
meet with the leaders of the Democrat-controlled legislature on
And Illinois is at risk of another downgrade. A Moody's
Investors Service analyst on Friday repeated a warning that the
agency could cut Illinois' A2 rating if efforts at pension
Credit rating agencies and investors in the U.S. municipal
bond market have been calling for pension action. But lawmakers
adjourned their spring session Friday night without passing
pension reform as House Speaker Michael Madigan and Senate
President John Cullerton each backed different approaches and
could not work out a compromise.
Cullerton spokeswoman Rikeesha Phelon said talks to chart a
path forward for pension reform have been going on since Friday.
"He fully expects that in the coming days and weeks an
action plan can be developed," she said.
A coalition of public labor unions that backed Cullerton's
measure - which would give workers and retirees choices on
benefit changes - said the Fitch downgrade would have been
avoidable had the House taken up and passed that bill. Madigan's
plan, which the unions vowed to fight in court on constitutional
grounds, would unilaterally require current workers and retirees
to accept reduced pension benefits.
Secondary market trading in Illinois bonds was on the light
side ahead of news of the Fitch downgrade. The spread over U.S.
Treasuries for some taxable pension bonds widened slightly from
previous sessions, but that could largely be due to gains in
prices for Treasury bonds on Monday, according to Domenic
Vonella, an analyst at Municipal Market Data, a unit of Thomson
Randy Smolik, another MMD analyst, said it typically takes
two to three days for bad news to shake out in the secondary
market for municipal bonds.
Illinois' so-called credit spread over MMD's benchmark
triple-A scale for the municipal market remained at 140 basis
points for the seventh-straight week. That spread is the
second-widest after Puerto Rico among major muni debt issuers
tracked by MMD.
Credit markets will closely monitor pension negotiations
called for this week by Quinn, said Robert Amodeo, portfolio
manager at Western Asset, who helps oversee $30 billion in
"It will take some time before the market penalizes them. It
will give them some time to call a special session," Amodeo said
over the weekend. "If talks break off, the marketplace will
John Sinsheimer, Illinois' capital markets director,
declined to comment on Monday about plans to sell up to $1
billion of general obligation bonds as soon as this month.
In January, Illinois postponed a $500 million GO bond sale
after Standard & Poor's Ratings Service downgraded the state a
notch to A-minus with a negative outlook. The state later sold
$800 million of tax-exempt and taxable GO bonds in April.