SPRINGFIELD – A major credit-rating house took a more positive outlook Tuesday on Illinois’ ability to pay its debts, a rare economic bright spot for the state one week after lawmakers approved major pension-reform legislation.
Standard & Poor’s declared Illinois’ fiscal outlook as “developing,” an improvement, if a somewhat fuzzy one, over its previous “negative” outlook.
S&P affirmed its A- minus rating – sixth from the best – on Prairie State debt that is backed by general tax revenue.
The announcement came after each of the other two major agencies said the pension reform action was a “credit positive.” The Legislature voted for the measure Dec. 3, and Gov. Pat Quinn signed it into law two days later.
“The ratings agencies are recognizing that Illinois is moving in the right direction,” Democrat Quinn, who’s running for re-election in 2014, said in a prepared statement. “ ... This improved outlook will be the first of many positive developments toward a revitalized and stronger Illinois.”
Quinn was particularly enthused because in his quest for a pension-reform bill, he often cited the impact on credit-worthiness, noting that downgrades in ratings means the state pays more in interest when it borrows money.
S&P made it clear its action resulted from the pension law, which reduces state employees’ contributions but also reduces their retirement benefits on the way to a 30-year plan to reduce the $100 billion deficit largely in four state pension accounts. But it warned of challenges to come.
“The ‘developing’ outlook reflects the implementation risk – legal and budgetary – associated with various provisions of the pension reform, as well as the overall structural budget challenges facing the state.” S&P credit analyst Robin Prunty said in a statement.
For one, labor unions have threatened a lawsuit challenging the new law’s constitutionality. Critics believe the law violates the prohibition on reducing promised benefits to state workers.
Another, S&P said, is a temporary 67 percent income tax increase that is expiring at the end of 2014.
An adverse court ruling or no action to continue or replace the income tax could negatively affect Illinois’ rating, S&P said.
Treasurer Dan Rutherford, one of four Republicans seeking the nomination to challenge Quinn for governor and an opponent of the pension deal, called it an “unusual rating” that “is indicative that there is still much work to be done.”
Fitch Ratings praised the pension deal last week and said it would analyze its impact. In the meantime, it maintained its A- rating with a negative outlook, which it says is its worst in the nation.
Illinois’ rating of A3 with a negative outlook from Moody’s Investors Service is also the lowest among its states and remained unchanged after the pension vote despite its “credit positive” statement.