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Rating Action:

Moody's assigns A3 to State of Illinois' $1B GO Bonds of February 2014; outlook negative

Global Credit Research - 28 Jan 2014

State has $27B of GO debt outstanding

New York, January 28, 2014 --

Moody's Rating

Issue: General Obligation Bonds, Series of February 2014; Rating: A3; Sale Amount: $1,000,000,000; Expected Sale Date: 02/06/2014; Rating Description: General Obligation

Opinion

Moody's Investors Service has assigned an A3 rating to the State of Illinois' planned issuance of $1 billion in General Obligation Bonds, Series of February 2014. The outlook is negative. The bonds are scheduled for pricing in a negotiated sale on February 6. Proceeds will finance various state capital projects, in areas such as transportation and education.

SUMMARY RATING RATIONALE

Despite a substantial pension reform law passed in December, the state's rating remains A3, with a negative outlook. If upheld by the courts, the law will be positive for the state. Enactment started the required legal process of determining whether constitutional pension benefit protections prevent Illinois from altering certain pension plan provisions to reduce its accrued liabilities. The legal process may invalidate the reform package altogether, or reject pieces of it. If allowed, the reforms may put Illinois on track to manageable long-term pension funding, but the state's pension burden still will remain heavy. Also pressuring the state's finances is a long history of fiscal imbalances and a practice of payment deferrals. The state's backlog of unpaid bills eased in fiscal 2013, but projections show that it could surge in coming years, because of tax cuts taking effect next January. As offsets to these challenges, Illinois has a large and diverse economy, with above-average wealth, and it has strong powers over revenue and spending. State law provides the highest priority to the payment of general obligation debt service.

STRENGTHS

--Sovereign powers over revenue and spending

--Statutory provisions giving priority to debt service over other state expenditures

--Large, diverse, and wealthy economy

CHALLENGES

--Severe pension funding shortfall

--Chronic use of payment deferrals to manage operating fund cash

--Long-term weak management practices reflected in pension under-funding, bill payment delays and chronic GAAP-basis negative fund balances

OUTLOOK

Illinois' negative outlook reflects our expectation that the state's financial position may deteriorate further because of factors including the loss of revenue from income tax increases set to expire next year. However, the implementation of pension reforms passed in December could improve the state's credit standing, by reducing accrued liabilities and making annual funding requirements more manageable.

WHAT COULD MAKE THE RATING GO UP

--Implementation of a credible, comprehensive long-term pension funding plan, after favorable court ruling

--Substantial progress in reducing payment backlog, with adoption of a legal framework or plan to prevent renewed buildup of bills

--Establishment of a pattern of structurally balanced budgets

WHAT COULD MAKE THE RATING GO DOWN

--Failure to address impending revenue loss from partial sunset of 2011 tax increases

--Significant further deterioration in pension funded status

RATING METHODOLOGY

The principal methodology used in this rating was US States Rating Methodology published in April 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edward Hampton
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Marcia Van Wagner
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns A3 to State of Illinois' $1B GO Bonds of February 2014; outlook negative
No Related Data.
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