Illinois, the state with the worst-funded pension system, had the rating on its general obligation debt cut one level by Standard & Poor’s and might face more downgrades.
The change to an A rating came after state lawmakers failed to agree on a plan to reduce retirement costs during a special session Aug. 17. The outlook for the state’s debt, which now has S&P’s sixth-highest grade, is negative. California, with an A- ranking, one level below Illinois, remains S&P’s lowest-rated state.
Illinois has an unfunded pension liability of at least $83 billion, according to state figures. It had 45% of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states, data compiled by Bloomberg show.
“The downgrade reflects the state’s weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Robin Prunty, an S&P analyst, in a report Wednesday.
Gov. Pat Quinn on Wednesday said he is inviting legislative leaders to meet in early September to work on pension changes. Lawmakers have considered boosting employee contributions, passing some costs to local school districts.
Mr. Quinn said the rating cut wasn’t a surprise. Erasing the unfunded pension liability “is vital to getting our financial house in order,” he said in a statement. “Today’s action by Standard & Poor’s is more evidence that we must act.”
Illinois had about $28 billion of general obligation debt as of May 8, according to bond documents.
Taxpayers will pay more to issue debt because of the lower rating, state Treasurer Dan Rutherford said in a statement. “I urge the Legislature to act decisively toward comprehensive, constitutional and fair pension reforms that will reverse this situation,” he said.
S&P assigned a negative outlook for the state because of possible additional “erosion” of Illinois’ pension funds during the next two years. Individual and corporate tax increases will expire on Jan. 1, 2015, which might weaken financial operating results, S&P said.
