Pension inaction brings more S&P downgrades

Reuters1:40 p.m. CST, January 25, 2013

Illinois’ credit standing took another tumble on Friday as Standard & Poor’s Ratings Services downgraded the state by one notch to A-minus and raised the possibility it could fall further.

S&P, which had lowered Illinois to A from A-plus in August, placed a negative outlook on the lower rating, saying legislative consensus and action would be needed to tackle challenges, including the state’s huge unfunded public pension liability.

“While it is unusual for a state rating to fall into the BBB category, lack of action on pension reform and upcoming budget challenges could result in further credit deterioration, particularly if it translates into weaker liquidity,” S&P said in a report.

Illinois joins California in having the lowest rating among states S&P rates, although California’s outlook is positive.

Illinois’ A2 rating with a negative outlook from Moody’s Investors Service is already the lowest state rating from that credit agency. Earlier this month, Fitch Ratings put Illinois on a watch list for a potential downgrade of its A rating over the next six months.

A drop into the BBB category would keep Illinois just above the BB category, where debt is considered junk.

S&P said an upgrade for the state was highly unlikely.

“We believe there is limited upside potential for the rating in the next two years given the size of the accumulated deficit and the liability challenges Illinois faces but will evaluate the state’s progress in addressing key budget and pension challenges,” the rating agency said.

S&P cited Illinois’ lower pension funded ratios and lack of action on pension reforms for the latest downgrade.

“While legislative action on pension reform could occur during the current legislative session and various bills have been filed, we believe that legislative consensus on reform will be difficult to achieve given the poor track record in the past two years,” the rating agency said.

An Illinois legislative commission reported in November that the state’s unfunded pension liability jumped to $96.8 billion at the end of fiscal 2012, up from $83 billion in fiscal 2011. The funded ratio, which was already the lowest among states, fell to 39 percent from 43.3 percent.

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