Fitch: Circuit Court Decision on Illinois Pension Reform Not an Immediate Credit Concern

NEW YORK--()--Friday's circuit court ruling that the State of Illinois' 2013 pension reform is unconstitutional does not raise a new credit concern for Fitch. Fitch has not factored the benefits of pension reform into the state's rating, currently the lowest for a U.S. state at 'A-' with a Negative Outlook, and the outsized unfunded pension liability is a significant negative factor in the state's rating. It was always clear that the reform would confront a strong legal challenge, which Fitch expects will require review by the state supreme court.

Of more immediate credit concern for Fitch is the decision that Illinois faces around the scheduled 2015 expiration of temporary tax increases. The state passed a placeholder budget for the current fiscal year with a stated intent to revisit the issue after the November elections. Taking steps to address the long-standing structural mismatch between revenues and spending would put the state on more solid financial footing, while failure to take action would be a return to past practices and leave the state poorly positioned to confront future downturns.

Fitch viewed the passage of pension reform in 2013 as a positive indication of the state's willingness to take action on this complicated issue after many failed attempts. The reform would reduce unfunded liabilities and temper the growth in pension payments required by the state. However, Fitch has also noted that legal protection of pension benefits is particularly strong in Illinois. While the state believes it has made sufficient accommodation to survive the constitutional challenge, this ruling is clearly a set-back and if upheld would mean that pensions will remain an acute pressure on the state's future fiscal operations. A July 2014 state supreme court ruling that the state's constitutional pension protection applies to other post-retirement benefits as well increases the significance of the decision, as Illinois' OPEB liability is also well above average for a state.

For more information on Fitch's rating on Illinois, see Fitch Research 'Comparing California, New Jersey and Illinois: How the Only U.S. States Rated in the 'A' Category Compare -- And Where They Are Headed' dated Nov. 3, 2014, available at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Pension Pressures Continue: 2014 State Pension Update' (May 2014);

--'U.S. State OPEB Liabilities' (June 2014);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 2012).

Applicable Criteria and Related Research:

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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Contacts

Fitch Ratings
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com