"The downgrade reflects what we view as the state's weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions," said Standard & Poor's credit analyst Robin Prunty.
The aggregate pension funded ratios on an actuarial basis declined to 40.4% at fiscal year-end 2012, compared with 43.4% in fiscal 2011. Based on the state's current projections, the funded ratio will decline further to 39% in fiscal 2013. The continued decline in pension funded ratios is due in part to contributions below the annual required contribution, investment returns below assumptions, and lower investment return assumptions. If there is meaningful legislative action on reform, we believe that there could be implementation risk based on the potential for legal challenges, and it could be several years before reform translates into improved funded ratios and budget relief.
Key factors supporting the 'A-' ratings include what we view as Illinois':
- Deep and diverse economy, which is anchored by the Chicago metropolitan statistical area;
- Above-average income levels;
- Almost unlimited ability to raise tax and other revenues due to its sovereign powers and the absence of constitutional revenue-raising limits;
- Well-established priority of payment for debt service established by statute;
- Ability to adjust disbursements to stabilize cash flow and to access substantial amounts of cash reserves on deposit in other funds for debt service, if needed, and for operations if authorized by statute; and
- Recent efforts to improve structural budget balance and to enhance financial and budget management capabilities.
- Sizable budget-based deficits for fiscal years 2009 through 2012 despite revenue-enhancement measures implemented in 2011 that we view as significant;
- A historically large generally accepted accounting principles general fund balance deficit;
- Large unfunded actuarial accrued liability (UAAL) for its five pensions; and
- A moderately high and growing debt burden due to debt issuance for current pension contributions in fiscal years 2010 and 2011, and the approved long-term capital program.
Illinois State Treasurer Dan Rutherford held a conference call Friday afternoon to address the issues facing the state and how he believes Illinois can recover.