Fitch Places Illinois Bonds on Negative Rating Watch
Fitch Ratings has placed the 'A' rating on the general obligation (GO)
bonds of the State of Illinois on Rating Watch Negative. The rating
action affects approximately $26.2 billion in outstanding GO bonds of
the state. Ratings linked to the state GO rating, listed at the end of
this release, have also been placed on Rating Watch Negative.
The Rating Watch Negative reflects the ongoing inability of the state to
address its large and growing unfunded pension liability, most recently
through the failure to pass pension reform in the 'lame duck' portion of
the 97th general assembly legislature that ended on Jan. 8. Fitch
believes that the burden of large unfunded pension liabilities and
growing annual pension expenses is unsustainable. The Rating Watch
Negative will be resolved after an assessment of the extent to which the
state takes action within the next six months that limits the impact of
pension payments on the budget while bolstering pension funded levels.
Failure to achieve meaningful results would lead to a downgrade of the
Illinois's long-term liabilities, particularly pension liabilities, are
very high for a U.S. state. As of June 30, 2012, the unfunded actuarial
accrued liability was reported at $94.6 billion, resulting in a 40.4%
reported funded ratio. This large unfunded pension liability is despite
the issuance of pension obligation bonds and passage of bipartisan
comprehensive pension reform affecting new employees in March 2010.
Annual pension funding requirements have been increasing significantly
and growing pension payments are crowding out other expenditure growth
and absorbing revenue growth. Pension payments from the general fund
increased $965 million to $5.1 billion in 2013, an increase of 23%,
reflecting in part the use of more conservative investment return
assumptions. Fitch notes that even these large payments, which consume a
well-above-average percentage of the state's general fund budget, are
based on statutory formula and are below the actuarially required
Several reform proposals have been presented by the governor and various
legislators that would adjust benefits for existing employees, increase
employee contributions, limit cost of living increases, and increase the
retirement age. Other proposed structural changes to the pension program
include shifting some responsibility for employer contributions to
school districts and state universities and establishing a 30-year
funding schedule based on the ARC that aims to reach 100% funding by
2042. Under current statute, annual contributions are designed to reach
90% funding by 2045. Fitch believes that enactment of reform is critical
to the long-term stability of the state's fiscal position, although
legal protection of pension benefits is particularly strong in Illinois
and Fitch expects any changes to be litigated.
The 'A' rating on Illinois's GO bonds reflects the state's broad based
and diverse economy offset by the challenges presented by a budget that
is balanced through significant temporary tax increases, high long-term
liabilities including pensions, and a large accounts payable backlog
that reflects the payment deferrals the state used to manage its
operating deficit through the downturn.
The state's GO bonds benefit from 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.
For more information on Fitch's 'A' GO rating on the State of Illinois,
including other key rating drivers and possible triggers for rating
action, please see the Fitch release titled 'Fitch Affirms 'A' Rating on
Illinois GO Bonds; Outlook Stable' dated Sept. 7, 2012 and available at 'www.fitchratings.com'.
In conjunction with the action on the state's GO rating, Fitch has
placed on Rating Watch Negative the 'A-' rating of the following
credits, which rely on state appropriation and are rated one notch below
the state GO rating:
--$438 million Illinois Sports Facilities Authority, sports facilities
bonds (state tax supported) series 2001.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012.
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14,
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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