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Illinois General Obligation Debt Rating Lowered To 'A-' From 'A' On Weakened Pension Funded Ratios; Outlook Negative

Publication date: 25-Jan-2013 13:24:19 EST

NEW YORK (Standard & Poor's) Jan. 25, 2013--Standard & Poor's Ratings Services 
lowered its rating on Illinois' general obligation (GO) bonds to 'A-' from 
'A'. At the same time, Standard & Poor's assigned its 'A-' rating to the 
state's $500 million GO bonds of February 2013. The outlook is negative.

"The downgrade reflects what we view as the state's weakened pension funded 
ratios and lack of action on reform measures intended to improve funding 
levels and diminish cost pressures associated with annual contributions," said 
Standard & Poor's credit analyst Robin Prunty. 

The aggregate pension funded ratios on an actuarial basis declined to 40.4% at 
fiscal year-end 2012, compared with 43.4% in fiscal 2011. Based on the state's 
current projections, the funded ratio will decline further to 39% in fiscal 
2013. The continued decline in pension funded ratios is due in part to 
contributions below the annual required contribution, investment returns below 
assumptions, and lower investment return assumptions. 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. If there is meaningful legislative action on reform, we believe that 
there could be implementation risk based on the potential for legal 
challenges, and it could be several years before reform translates into 
improved funded ratios and budget relief. In addition, Illinois has to manage 
other challenges, which include pending statutory reduction of rates on the 
personal and corporate income taxes beginning in fiscal 2015 and a high level 
of accumulated payables, combined with the more typical pressures facing the 
state sector in terms of a slow economic recovery, potential federal fiscal 
consolidation, and health care reform implementation. 

Key factors supporting the 'A-' ratings include what we view as Illinois':
  • Deep and diverse economy, which is anchored by the Chicago metropolitan statistical area;
  • Above-average income levels;
  • Almost unlimited ability to raise tax and other revenues due to its sovereign powers and the absence of constitutional revenue-raising limits;
  • Well-established priority of payment for debt service established by statute;
  • Ability to adjust disbursements to stabilize cash flow and to access substantial amounts of cash reserves on deposit in other funds for debt service, if needed, and for operations if authorized by statute; and
  • Recent efforts to improve structural budget balance and to enhance financial and budget management capabilities.
Offsetting these generally positive credit factors are what we consider:
  • Sizable budget-based deficits for fiscal years 2009 through 2012 despite revenue-enhancement measures implemented in 2011 that we view as significant;
  • A historically large generally accepted accounting principles general fund balance deficit;
  • Large unfunded actuarial accrued liability (UAAL) for its five pensions; and
  • A moderately high and growing debt burden due to debt issuance for current pension contributions in fiscal years 2010 and 2011, and the approved long-term capital program.

The negative outlook reflects what we view as the range of challenges Illinois 
faces that will require legislative consensus and action. We believe the 
outcome of deliberations relating to pension reform and the expiration of 
current personal and corporate income tax rate increases on Jan. 1, 2015, 
along with other normal budget pressures, could have a profound effect on the 
state's budgetary performance and liquidity over the two-year outlook horizon. 
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. We could revise the outlook to stable if Illinois achieves pension 
reform that lowers liabilities and associated costs to the state and takes 
credible actions to achieve structural budget balance over the two-year 
outlook horizon. 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.

Temporary contact number: Robin Prunty (914-582-7470)

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 

Primary Credit Analyst:Robin L Prunty, New York (1) 212-438-1000;
Secondary Contact:John A Sugden, New York (1) 212-438-1000;

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