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Moody's cites 'positive' moves in new Illinois budget

CHICAGO (Reuters) - The fiscal 2019 Illinois budget enacted last week includes a voluntary pension buyout plan and a boost in school funding, which are credit-positive moves for the relatively low-rated state and its school districts, Moody’s Investors Service said on Monday.

The $38.5 billion budget for the fiscal year that begins on July 1 incorporates $423 million in savings that would be generated by current or former public-sector workers choosing to accept a buyout of their pensions or a retirement benefit in exchange for cash raised by the sale of up to $1 billion of state general obligation bonds.

“The state’s buyout offer is credit positive because it will generate significant pension liability savings to the extent that employees accept the offer,” Moody’s said, adding that actual savings could fall short if participation fails to meet targets of 22 percent of vested former workers and 25 percent of retiring current workers.

Moody’s is the second major credit ratings agency to weigh in on aspects of Illinois’ new budget. Last week, S&P Global Ratings, which rates the state one notch above junk at BBB-minus with a stable outlook, said the new budget does little to tackle Illinois’ financial problems.

Illinois’ adjusted net pension liability for its five retirement funds was $201 billion in fiscal 2016, the highest on a revenue and gross domestic product basis among the 50 states, according to Moody’s.

Moody’s, which also rates Illinois a notch above junk at Baa3 with a negative outlook, said actuarial projections for the State Employees’ Retirement System indicate the buyout plan could result in significant present-value savings.

It added that the actual impact on the budget and the state’s pension funding requirements will not be known until late in fiscal 2019.

“As a result, the state faces a risk that the plan will either increase its underfunding of pension contributions or add to a backlog of unpaid bills,” Moody’s said.

Meanwhile, the budget’s $350 million funding increase for primary and secondary public schools is credit-positive for the districts “because it increases funding consistent with last year’s change to the state aid formula,” according to Moody’s.

It added that schools continue to face risks due to Illinois’ history of delaying grant payments for transportation and other costs and from a possible future shift onto districts of pension costs currently paid by the state.

Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis