S&P cuts Illinois bond rating to A, keeps outlook negative

Wednesday, August 29, 2012

CHICAGO Aug 29 (Reuters) - Standard & Poor's Ratings Services on Wednesday downgraded Illinois' credit rating by one notch to A from A-plus, citing the state's large budget imbalance and an $83 billion unfunded pension liability.

The action the state's general obligation bonds comes less than two weeks after a special Illinois legislative session on pension reform ended with no resolution on reining in the pension costs.

"The downgrade reflects the state's weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions," said S&P analyst Robin Prunty in a statement.

It also keeps Illinois as the second lowest-rated U.S. state after California, which is rated A-minus by S&P.

S&P had warned in March that a downgrade was in store if Illinois' longstanding fiscal problems were not dealt with.

The lower rating also reflects Illinois' "continued financial weakness despite significant measures in the past two years to improve structural budget performance," Prunty said.

The credit ratings agency kept a negative outlook on the lowered rating, citing the potential for further erosion of the state's pension liability over the next two years and budget risks due to the Jan. 1, 2015 expiration of big income tax rate increases enacted in 2011.

S&P's A rating for Illinois matches the A2 rating that resulted from a downgrade by Moody's Investors Service in January. That left Illinois with the lowest rating among states Moody's rates. Illinois is also rated A by Fitch Ratings.