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June 3, 2013
By: Greg Hinz

The first reaction is in from Wall Street to the Illinois Legislature’s failure to enact pension reform last week, and it’s negative.

Fitch Ratings, one of the big firms that issues reports to investors on creditworthiness, lowered Illinois’ rating to “A-” from “A.”

In addition, ratings based on Illinois appropriations went to “BBB+” from “A-.” And the outlook on state debt is negative, meaning that the rating could be reduced further.
Check out the report from Fitch below.

Last week, Moody’s warned that its rating of Illinois could fall without pension reform.
That’s part of the reason Fitch’s move today was not a surprise to anyone.

Said Gov. Pat Quinn in a statement this afternoon, “As I have repeatedly made clear to the General Assembly, this will continue to happen until legislators pass a comprehensive pension reform bill and put it on my desk.”

Fitch’s action gives Illinois the lowest general obligation bond rating of any of the 50 states. The agency was absolutely clear as to why: “The ongoing inability of the state to address its large and growing unfunded pension liability,” according to its report.

That’s a reference to a sharp split between Illinois House Speaker Michael Madigan and Senate President John Cullerton over how to change the state’s retirement systems.
“That failure to achieve reform measures (last week), despite the substantial focus on this topic, exacerbates concern about management’s willingness and ability to address the state’s numerous fiscal challenges,” Fitch wrote.

Illinois’ core “A-” rating now is the same as the one Fitch gave California, but with our “negative” outlook we’re worse than the “neutral” Golden State.

As bad as today’s news is — as the state’s credit rating goes down, up goes the amount taxpayers have to pay to retire state bonds — Fitch underlined that even worse news likely is on the way.

“Maintenance of the ‘A-’ rating will require timely action in advance of the expiration of the temporary (income) tax increases in fiscal 2015,” wrote Karen Krop, Fitch’s primary analyst on Illinois. “Deterioration in the state’s financial position, as evidenced by excessive use of nonrecurrent revenues or additional payment deferrals, would likely lead to a negative rating action.”

Describing the state’s overall long-term liabilities as “very high,” the New York firm termed the pension situation “unsustainable.”

Though some minor improvements have been made in state finances, it said, the state still has more than $5 billion in unpaid bills, and the failure of the Legislature to enact pension reform last week “reflects a management profile that is inconsistent with maintenance of the ‘A’ rating.”

The other two big ratings firms, Moody’s Investors Service and Standard & Poor’s, have not yet spoken.

But I’ll be surprised if they don’t join in doing a dance on the state’s collective financial head.
4:35 p.m. update: Some reaction of note from We Are One Illinois, the main union coalition in Springfield: “Today’s downgrade was totally avoidable. Before it adjourned, the House could have passed Senate Bill 2404 — a fair, constitutional, comprehensive pension funding solution. Instead, Speaker Michael Madigan pushed SB 1, an unconstitutional bill that would have saved nothing and done nothing to help the state’s credit rating once overturned. An overwhelming, bipartisan majority of state senators saw through SB 1 and voted to reject it twice.”

Translation: Take what we’re offering, ’cause that’s all you’re gonna get.

5 p.m. update: More reaction to the Fitch action, this time from Illinois Treasurer Dan Rutherford, a candidate for the GOP nomination for governor next year: “It is disgraceful that this year’s legislative session ended without a new pension plan on the books . . . This rating action means that there have been ten negative issuances against Illinois by the various ratings agencies to Illinois’ bonding entities since the beginning of 2012 . . . It is beyond irresponsible to let this continue.”

Copyright 2013 Crain Communications, Inc.

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