Moody's downgrades Illinois' credit outlook, cites pension funding pressures

Illinois' credit outlook was downgraded to negative because “the state's pension funding pressures are likely to persist and perhaps worsen in the near term,” according to a Moody's Investors Service report.

While the report reaffirmed the state's A2 credit rating on general obligation debt, it lowered the credit outlook from stable, putting at the top of its concerns the state's unfunded pension obligations.

“If the Legislature in coming weeks or months enacts significant pension reforms, they are almost certain to be challenged, given the state's constitutional protection of retiree benefits,” the report said. “Political pressures, coupled with the threat of litigation, may mean that any reforms enacted have only a marginal effect on liabilities.”

The “state's existing tax structure will not provide enough revenue to address the rising cost of pension benefits and other state expenses,” said the report, which was released Thursday.

The state's five retirement systems had a combined funding ratio of 39%, with an unfunded actuarial accrued liability of $97 billion; assets total $62 billion and liabilities, $158.6 billion, as of June 30, the report said.

“Under current Illinois pension funding law, state contributions will account for increasing shares of (state) resources in coming years without substantially boosting the pensions' funded status; state figures indicate a combined funded ratio … of less than 50% even in 2020,” the report said.

Moody's sees “substantial risk of outcomes other than successful pension reform, suggesting that the steady growth of pension funding pressure will continue,” the report states.

The partial sunset of the state's 2011 income tax revenue “would leave the state grappling to cope with increased pension funding costs at a time when its revenues are dropping significantly,” the report said.

In fiscal year 2016, which ends June 30, 2016, when lower income tax rates are in effect, the report projects the loss of revenue at $2.2 billion, compared with the fiscal year ending June 30, 2014.

The five pension systems include the $37.5 billion Illinois Teachers' Retirement System, Springfield and the $14 billion Illinois State Universities Retirement System, Champaign. The Illinois State Board of Investments, Chicago, oversees the combined $11.8 billion in assets of the Illinois State Employees' Retirement System, the Illinois Judges' Retirement System and the Illinois General Assembly Retirement System, all based in Springfield.