Fitch downgrades Illinois ratings, may cut again

Tuesday, March 30, 2010

NEW YORK, March 29 (Reuters) - Fitch Ratings on Monday downgraded Illinois' general obligation bonds and said it may lower them again on concerns about the state's ability to close a budget deficit and cope with huge pension liabilities.
Fitch downgraded Illinois' rating by one notch to A-minus, putting it four notches above speculative, or "junk" status.
The agency also downgraded ratings on debt based on the state's appropriation to BBB-plus, or three notches above junk.
The action "reflects the magnitude and persistent nature of the state's fiscal problems and the likelihood that the budget to be enacted for fiscal 2011 will not sufficiently address either the annual operating deficit or accumulated liabilities," the agency said.
Fitch is the third of the major rating agencies to weigh in on Illinois, which is gearing up to sell at least $1.0 billion of Build America Bonds in the coming weeks.
The state is also planning to sell $250 million of one-year GO bonds on April 1.
Standard & Poor's on Friday placed its A-plus rating on review for a possible downgrade. Moody's Investors Service kept its A2 rating unchanged, but maintained a negative outlook.
David Vaught, head of the governor's Office of Management and Budget, said the ratings actions underscore the need for the state to find recurring solutions to achieve fiscal balance.
Fitch echoed the concerns of its rivals about Illinois' massive unfunded pension liability and rising debt burden that will be exacerbated by further borrowing.
Illinois lawmakers last week moved to address the pension problem with passage of a bill that reduces benefits for new government hires, extends their retirement age and cuts other benefits.
The state's unfunded pension liability hit $77.8 billion at the end of fiscal 2009, according to the legislature's Commission on Government Forecasting and Accountability.
Fitch said failure to enact recurring budgetary measures that address the cumulative deficit and reduce the accounts payable balance could trigger another downgrade.
The agency said last week it is moving ahead with a recalibration of certain municipal bond ratings that will result in a one to two notch improvement for issuers.
In the case of Illinois, the recalibration, scheduled for April 5, will bring the state's GO bonds back up to A-plus, although they will remain on review for a possible downgrade.
The rating on appropriations-backed bonds will be revised to A, and also remain on negative watch.