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Rating Action:

Moody's downgrades State of Illinois' $27 billion of General Obligation Bonds to A3 from A2

Global Credit Research - 06 Jun 2013

Negative outlook maintained; related debt ratings also lowered, affecting $32 billion in total

New York, June 06, 2013 -- Moody's Investors Service has downgraded the State of Illinois' $27 billion of outstanding general obligation bonds to A3 from A2 and maintained the state's negative outlook. As a consequence of this action, we have also downgraded by a notch the ratings on related credits, which currently have about $5 billion in outstanding debt.

SUMMARY RATING RATIONALE

The Illinois General Assembly on May 31 concluded its session without addressing the severe pension liabilities that are the state's greatest credit challenge. Our rating now assumes the government will not take action to reduce the state's pension liabilities any time soon. The legislature's political paralysis to date shows not only the magnitude of Illinois' unfunded benefit liabilities, but also the legal and political hurdles to legislation that would make pensions more manageable long term. Without significant reforms, substantial growth in both unfunded liabilities and in annual funding burden are likely in coming years. This trend may coincide with the expiration of most of the income tax increases the state imposed in fiscal 2011 to help cover pension costs. As a consequence, its payment backlog will likely remain large, despite some recent signs of improvement. An A3 rating, while very low for a US state, is consistent with the General Assembly's inability to steer the state from a path to fiscal distress. Illinois still has a diverse and large economic base, with above-average wealth levels.

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 and bill payment delays

OUTLOOK

The negative outlook reflects our expectation that Illinois' pension liabilities will continue to grow, in the absence of substantive reform efforts, and that annual funding requirements will become unmanageable, particularly if no steps are taken to address the loss of revenue from expiring income tax increases in 2015.

WHAT COULD MAKE THE RATING GO UP

- Implementation of a credible, comprehensive long-term pension funding plan

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

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

- Failure to make legally required pension contributions in full

- Evidence of difficulty accessing the capital markets

RATING METHODOLOGIES

The principal methodology used in these rating actions was US States Rating Methodology published in April 2013. An additional, secondary methodology used for the Build Illinois Sales Tax Revenue Bonds was the US Public Finance Special Tax Methodology published in March 2012, and an additional, secondary methodology used for the Metropolitan Pier and Exposition Authority and Civic Center Bonds was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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

Emily Raimes
VP - Senior Credit Officer
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 downgrades State of Illinois' $27 billion of General Obligation Bonds to A3 from A2
No Related Data.

 

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