NEW YORK--(BUSINESS WIRE)--The Illinois Supreme Court decision finding 2013 pension reform unconstitutional is clearly a set-back for state budget managers but does not have an immediate impact on Fitch's rating of the state. It was always clear that the reform would confront strong legal challenge that Fitch anticipated would be resolved at the state supreme court level. Fitch has long noted that legal protection of pension benefits is particularly strong in Illinois and did not factor the benefits of the reform into the state's rating.
Illinois is currently the lowest-rated U.S. state at 'A-' with a Negative Outlook, and the outsized unfunded pension liability is a significant negative factor in that rating. The ruling leaves pensions as an acute pressure on the state's fiscal operations.
Budget pressures, including due to pensions, underpin the Negative Outlook. The state needed to take significant one-time actions to fill a $1.6 billion gap in the current fiscal 2015, following the expiration of temporary tax increases. The state faces an even larger $6 billion gap in fiscal 2016, which starts on July 1, reflecting the full-year impact of the expirations. The governor has proposed solving this gap with spending reductions, including assumed savings from another attempt at pension reform. The budget is currently being reviewed in the legislature.
The outcome of budget negotiations for the coming fiscal year will be significant to Fitch's evaluation of the Illinois credit. Taking steps to address the long-standing structural mismatch between revenues and spending would put the state on more solid financial footing. Alternatively, failure to take action or assuming significant savings from pension reform that is likely to be subject to legal challenge would be a return to past practices and leave the state particularly poorly positioned to confront future downturns.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. States Snapshot - A Compilation of Fitch's State Credit Assessments and Rating Histories' (March 2015);
--'Comparing California, New Jersey and Illinois' (November 2014);
--'Pension Pressures Continue: 2014 State Pension Update' (May 2014);
--'U.S. State OPEB Liabilities' (June 2014);
--'U.S. State Government Tax-Supported Rating Criteria' (August 2012).
Applicable Criteria and Related Research:
U.S. States Snapshot (A Compilation of Fitch's State Credit Assessments and Rating Histories)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863069
Comparing California, New Jersey and Illinois (How the Only U.S. States Rated in the 'A' Category Compare -- And Where They Are Headed)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=796908
Pension Pressures Continue (2014 State Pension Update)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747605
U.S. State OPEB Liabilities (Liability Limited for Most; Uncertain Assumptions Drive Calculations)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749317
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
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