Illinois' lowest-among-states credit rating took a new hit on Monday as Fitch Ratings downgraded the state's credit just days after Illinois lawmakers left the state capitol last week without addressing a huge public pension funding crisis.
"Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable, and that failure to achieve reform measures despite the substantial focus on this topic exacerbates concern about management's willingness and ability to address the state's numerous fiscal challenges," the rating agency said in a statement.
The state's general obligation rating was cut a notch to A-minus with a negative outlook, affecting $27.5 billion of outstanding debt. Illinois, which had been expected to sell up to $1 billion of GO bonds as soon as this month, likely would need to offer a higher interest rate on its securities because of the downgrade.
Fitch also warned that Illinois' lower rating could be in further jeopardy if the state does not take action to stabilize its finances ahead of the planned partial rollback in 2015 of big income tax rate increases enacted in 2011.
"Deterioration in the state's financial position, as evidenced by excessive use of non-recurring revenues or additional payment deferrals would likely lead to a negative rating action," Fitch said.
Illinois is alone among states in the scope of its use of delayed payments of bills and other obligations as a budget-balancing tool.
Even before the downgrade, Illinois had the lowest credit ratings among U.S. states as the state struggled with a nearly $100 billion unfunded pension liability caused by years of skipping or skimping on payments to its five retirement systems. Those payments are rising, threatening funding for core state services such as education and health care.
Governor Pat Quinn said he was not surprised by the rating downgrade.
"Every time the General Assembly misses the deadline, Illinois' credit rating is downgraded, which hurts our economy, wastes taxpayer dollars and short-changes the education of our children," he said in a statement, adding that he planned to meet with the leaders of the Democrat-controlled legislature on Tuesday.
Credit rating agencies and investors in the U.S. municipal bond market have been calling for pension action. But lawmakers adjourned their spring session Friday night without passing pension reform as House Speaker Michael Madigan and Senate President John Cullerton each backed different approaches and could not work out a compromise.
Secondary market trading in Illinois bonds was on the light side ahead of news of the Fitch downgrade. The spread over U.S. Treasuries for some taxable pension bonds widened slightly from previous sessions, but that could largely be due to gains in prices for Treasury bonds on Monday, according to Domenic Vonella, an analyst at Municipal Market Data, a unit of Thomson Reuters.
Randy Smolik, another MMD analyst, said it typically takes two to three days for bad news to shake out in the secondary market for municipal bonds.
Illinois' so-called credit spread over MMD's benchmark triple-A scale for the municipal market remained at 140 basis points for the seventh-straight week. That spread is the second-widest after Puerto Rico among major muni debt issuers tracked by MMD.
Credit markets will closely monitor pension negotiations called for this week by Quinn, said Robert Amodeo, portfolio manager at Western Asset, who helps oversee $30 billion in municipal assets.
"It will take some time before the market penalizes them. It will give them some time to call a special session," Amodeo said over the weekend. "If talks break off, the marketplace will penalize them."
John Sinsheimer, Illinois' capital markets director, declined to comment on Monday about plans to sell up to $1 billion of general obligation bonds as soon as this month.
In January, Illinois postponed a $500 million GO bond sale after Standard & Poor's Ratings Service downgraded the state a notch to A-minus with a negative outlook. The state later sold $800 million of tax-exempt and taxable GO bonds in April.
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