Fitch Downgrades Illinois, Drowing in Pensions


The State of Illinois has just seen its credit rating downgraded to A- from A for the state's general obligation bonds. This downgrade covers some $27.5 billion. Fitch also said that the ratings related to the state based on its appropriation are downgraded to ';BBB+' from ';A-.' Fitch's Rating Outlook is Negative on the state's ratings. State pensions are a key driver for this downgrade. It noted an ongoing inability of the state "to address its large and growing unfunded pension liability, most recently through the failure to pass pension reform during the regular legislative session…"

Long term tax solutions are needed. Fitch did observe that temporary increases in both the personal and corporate income taxes have been met by with statutory spending limits, all of which have closed a significant portion of the structural gap in the state's budget through fiscal 2014. In today's downgrade, the Negative Outlook was said to reflect the continued rating pressure presented by the need for solutions to both the budget and pension issues.

Illinois is listed as having a large accounts payable backlog of some $5 billion at the end of fiscal year 2012. Fitch did at least say that the state is using higher than forecast fiscal 2013 income tax collections to pay down a portion of the accounts payable balance, but ratings pressure remains with an accumulated liability and lower flexibility.

Fitch also addressed a strong pledge on the GO bonds. It said, "There is an irrevocable and continuing appropriation for all GO debt service, and continuing authority and direction to the state treasurer and comptroller to make all necessary transfers from any and all revenues and funds of the state. The state funds debt service in advance by setting aside 1/12 of principal and 1/6 of interest every month for payments due in the ensuing 12 months."

You may think that all this matters for is the $27 billion in bonds covered. It is far worse. Fitch said that the state's long-term liabilities are very high. As of the June 30, 2012 actuarial valuation, the unfunded actuarial accrued liability was reported at $94.6 billion and that generated a 40.4% reported funded ratio.

Pension payments from the general fund rose by $965 million (or 23%) to $5.1 billion in 2013 and pension payments are expected to increase another 18.2% to $6 billion in fiscal 2014.

Filed under: 24/7 Wall St. Wire, Analyst Calls, Bonds