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May 31, 2013

Moody’s Investors Service warned the state of Illinois that its credit rating could fall further if the legislature fails to fix the state’s huge public pension problem.

“Our view is that failure to enact pension reforms could drive the state’s general obligation bond rating lower from A2, which is already the lowest level for a U.S. state,” said Moody’s analyst Ted Hampton.

The Illinois Senate late Thursday soundly defeated a comprehensive pension reform bill passed by the House earlier in May, leaving lawmakers little time to forge a compromise before the spring legislative session is scheduled to end at midnight Friday.

Moody’s, along with Standard and Poor’s Ratings Services and Fitch Ratings, are closely watching developments on the pension front as leaders of the Democrat-controlled legislature face off on the issue.

House Speaker Michael Madigan and Senate President John Cullerton are at odds over how to approach reform. Madigan’s bill opts for unilateral cuts in retirement benefits for current and retired state workers, teachers, legislators, and college and university employees to reap the maximum cost savings.

Cullerton is pushing a bill passed by his chamber that would generally allow workers to retain access to state-sponsored healthcare in retirement if they opt for pension concessions.

A lower credit rating would raise Illinois’ cost for borrowing in the U.S. municipal bond market, where investors already demand hefty yields for the state’s general obligation bonds.

Illinois’ GO bond rating is the lowest among states after credit rating agencies collectively downgraded the state a dozen times since 2008. The agencies previously have warned that failure to fix the pension problem could result in further downgrades.

Karen Krop, an analyst at Fitch Ratings, which has Illinois’ A rating on a watch list for a possible downgrade, declined to comment until the legislature ends its session.

An S&P analyst was not immediately available for comment. S&P downgraded the rating on Illinois $26.6 billion of outstanding GO bonds to A-minus in January, citing a lack of action on pension reform.

Copyright © 2013 Tribune Company, LLC

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