CHICAGO, Dec 10 (Reuters) - Standard & Poor’s Ratings Services on Tuesday revised the outlook on Illinois’ A-minus credit rating to developing from negative due to the state’s passage of long-awaited pension reform last week.
The credit ratings agency said the revision to developing, an unusual outlook designation for a state, indicates that Illinois’ rating could be raised or lowered during a two-year horizon.
“Although we view the consensus achieved by Illinois on this difficult issue as positive from a credit standpoint, the developing outlook reflects the implementation risk - legal and budgetary - associated with various provisions of the pension reform as well as the overall structural budget challenges facing the state,” S&P analyst Robin Prunty said in a statement.
Illinois’ sweeping reforms to its public retirement system, which were signed into law by Governor Pat Quinn on Thursday, are aimed at easing a $100 billion unfunded pension liability that has been squeezing out funding for core state services.
State lawmakers said the measure will cut the unfunded liability by 20 percent and save the Midwestern state $160 billion over 30 years by reducing and suspending cost-of-living increases for retiree pensions as well as with other changes.
Public labor unions have attacked the law, which takes effect in June, for violating a state constitutional prohibition against diminishing retirement benefits for public workers. The unions’ fight against the law could lead to a protracted court battle.
S&P said invalidation or delayed implementation of the law and a continued structural budget deficit would have negative consequences for the state’s credit. However, if the pension reforms take hold and the budget imbalance is addressed starting in fiscal 2015, “a higher rating would be warranted.”
The outlook revision came ahead of Illinois’ sale of $350 million of taxable general obligation bonds in competitive bidding on Thursday. Fitch Ratings on Tuesday affirmed an A-minus rating with a negative outlook for the issue, while Moody’s Investors Service on Monday rated the bonds A3 with a negative outlook.
Legislative inaction on pension reform led to a series of downgrades that left Illinois with the lowest ratings among states.