Bond-rating agency shifts state financial outlook to negative

SPRINGFIELD-A top Wall Street bond-rating agency Wednesday raised the prospect of a downgrade on state bonds because of concerns over the newly implemented state budget and a recent court ruling on retiree health benefits.

Standard & Poor’s lowered its outlook on the state’s general obligation bonds to negative, though it retained its existing A- rating on state bonds.

“The outlook revision follows the enactment of Illinois’ fiscal 2015 budget, which in our view is not structurally balanced and will contribute to growing deficits and payables that will likely pressure the state’s liquidity,” Standard & Poor’s credit analyst Robin Prunty said in a prepared statement.

“The outlook also reflects the implementation risk associated with recent reforms related to postretirement benefits,” Prunty said.

That is a reference to a ruling earlier this month in which the Illinois Supreme Court overturned a lower court ruling that dismissed a challenge to a new state law that hike health-care premiums for retirees covered under five Illinois retirement systems.

The justices sent the case back to the lower court, noting that health-care benefits are protected under the Illinois’ constitution’s pension clause. That provision bars any diminishment of pension benefits to public retirees.

The ruling was widely interpreted as a signal on how the state’s high court might rule on a set of separate union challenges to a newly implemented state law that lowered cost-of-living adjustments for state retirees and made other benefit changes.

“While legislation to reform pensions and other post-employment benefits is considered positive, if the reforms do not move forward as planned we believe the significant fixed cost pressure associated with postretirement benefits will escalate,” Standard & Poor’s said in its statement Wednesday.

“This risk is highlighted by the recent Illinois Supreme Court decision to reverse the trial court’s dismissal of the suit relating to statutory changes to the state’s health insurance premium subsidies, which was remanded back to the lower courts. It is uncertain what the lower court will ultimately decide, but the Illinois Supreme Court was clear in its opinion that the health insurance subsidies paid by the state for retiree health care are a benefit derived from membership in a state pension plan and therefore subject to the Illinois constitution.”

Gov. Pat Quinn’s office responded to Wednesday’s development, noting that he had warned state lawmakers the budget plan they sent to him was unbalanced and carried potential consequences.

“Gov. Quinn was clear with legislators this year that bond-rating agencies would look with disfavor on a budget that did not contain enough revenue to cover a full year of the state’s needs on education, public safety and human services,” said Abdon Pallasch, assistant budget director. “The Legislature passed an incomplete budget, and this is the predictable result.”