January 25, 2013 9:31 pm

S&P downgrades Illinois’ credit rating

Standard & Poor’s cut Illinois’s credit rating by one notch on Friday on concerns the state is failing to bolster its finances as it seeks to close a $96bn unfunded pension liability.

S&P lowered the ratings on the debt to A- from A, and threatened to cut it again in a move that could raise Illinois’ borrowing costs ahead of the state’s planned sale of $500m in general obligation securities next week.

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“Lack of action on pension reform and upcoming budget challenges could result in further credit deterioration, particularly if it translates into weaker liquidity,” said Robin Prunty, an S&P analyst.

The downgrade impacts about $26bn in debt and left Illinois’ bonds only four notches above junk, tied with California as S&P’s lowest-rated state. Earlier this month Fitch also lowered the state’s ratings, and a Moody’s downgrade last year gave Illinois the lowest credit rating in the nation.

Illinois’ pension system is only 35 per cent funded, much lower the 80 per cent threshold considered “healthy”, according to data from Boston College’s Center for Retirement Research.

US states have been under pressure since the recession ripped large holes in their budgets as tax revenues plummeted. Many states have slashed spending and their revenues are now modestly growing.

But while Illinois raised state income tax rates by 67 per cent and business taxes by 30 per cent in 2011 to help stabilise its finances, filling the pensions gap will be difficult, with annual state and local tax revenues amounting to only about $55bn.

Illinois’s public employee pension costs is expected to increase by $1bn in the 2013 fiscal year, more than twice as much as originally expected, because of poor investment returns and longer life expectancies.

“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,” said Ms Prunty.

Average yields on bonds sold by the Illinois stood at 2.38 per cent on Friday, compared with 2.07 per cent on debt sold by California, according to Barclays indices.

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