US - Fitch Ratings has downgraded Illinois general obligation (GO) taxable bonds to A- from A over concerns about the state's unfunded pension liabilities and fiscal gap.
The agency assigned a lower rating to a total of US$24.4bn in debt issued by the US state and either placed or maintained a negative outlook on it.
In addition, it downgraded the ratings related to the state based on its appropriation to BBB+ from A-.
Fitch said: "There is a large unfunded pension liability, despite the issuance of pension obligation bonds. The state passed bipartisan comprehensive pension reform [last week], which should lower its future pension liability but is not likely to have a significant near-term affect on financial operations. Nevertheless, taking action on this longstanding issue is a credit positive."
Last week, the Illinois general assembly passed a bill which reduces pension benefits for new state employees, increases their retirement age to 67 and cuts other benefits in a bid to address the shortfall.
According to the Report on the Financial Condition of the Illinois State Retirement System released in June 2009, the state's total unfunded pension liabilities were $77.8bn, which equaled to a funding ratio of 38.5%.
The reform was backed by legislators from both parties. Governor Pat Quinn also praised the move: "The General Assembly took an important and vital step toward rescuing Illinois from fiscal calamity by passing public pension reform. This legislation will stabilize the public pension system, protect current state employees and provide attractive pension benefits to future state workers."
The other major ratings agencies are also watching Illinois' finances closely. Moody's Investors Service has withdrawn the A2 rating assigned on March 5 to Illinois' debt and maintains a negative outlook.
Moody's withdrawal of the rating reflects the postponement of some of Illinois' debt sale to April 6 from March 11, the agency said.
Fitch said it would recalibrate Illinois bonds on April 5. It will revise the GO bonds rating to A+ and the appropriations backed bonds to A, but will maintain a negative outlook on all state debt.
However, it added that the failure to enact budgetary measures tackling the fiscal deficit and reducing the accounts payable balance could trigger another downgrade.
On March 26, Standard & Poor's placed Illinois GO rating on "CreditWatch negative" due to its "widening budget gap".
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