A move being considered by the state of Illinois to sell up to $4.1 billion in pension obligation bonds at best could help maintain one of the worst state credit ratings in the nation and at worst lead to further downgrades for the cash-strapped state, according to ratings agencies.
The revenue generated from the proposed sale would go to three statewide pension plans. About $2.358 billion would go to the $33.2 billion Teachers' Retirement System of the State of Illinois, Springfield; $960 million to the Illinois State Board of Investment, Chicago; and $777 million to the $12.9 billion Illinois State Universities Retirement System, Champaign.
Illinois already has about $13 billion in pension obligation bonds still outstanding from $10 billion sold in 2003 and $3.4 billion in January.
Illinois is on credit watch from ratings agency Standard & Poor's, New York, with a rating of A+; it has been on watch since 2008 because of budget shortfalls and legal challenges against then-Gov. Rod Blagojevich, Robin Prunty, a director in S&P's public finance ratings group, said in a telephone interview. S&P put Illinois on credit watch with negative implications on March 23.
“All along it's been about their budgetary performance,” Ms. Prunty said, noting that California at A- is the only state with a lower credit rating.
Late last week, the General Assembly was hashing out a deal that would increase the state income-tax rate to 5.25%from 3%, which likely would help bolster the state's credit rating.
A Standard & Poor's report issued on June 15 states that an unwillingness to make structural changes to the state budget could result in a lowered rating. It also notes that issuance of more pension obligation bonds “place a strain on future budgets, especially when viewed in the context of increasing pension contributions that result from a low funded ratio.”
Another ratings service, Moody's Investor Services, thinks the bond sale won't change the funding woes of the state plans anytime soon. In a report issued Dec. 6, said the combined funded level of Illinois' state retirement systems would weaken further regardless of the additional pension bond sale.
The issuance “would at least limit deterioration in the funded status of the state's pensions, which are the lowest-funded among states,” the one-page report said. “Nonetheless, we expect the state's pension funded ratios to weaken further before improving, given that statutory contributions are below the actuarially determined amounts needed to amortize the plans' unfunded liabilities.”