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State's Fiscal Woes Expected to Mount as Fitch Puts Illinois on 'Negative Watch'

The next step might mean the state's credit rating is downgraded.

With the Illinois General Assembly failing to act on pension reform earlier this week, the State of Illinois’ bond rating took a hit on Friday as Fitch Ratings put Illinois’ bond obligations on negative watch.

The next step could mean Fitch's downgrading of the state’s credit rating, which would only add to the state’s financial woes.

“The Rating Watch Negative reflects the ongoing inability of the state to address its large and growing unfunded pension liability, most recently through the failure to pass pension reform in the 'lame duck' portion of the 97th general assembly legislature that ended on Jan. 8,” Fitch Ratings said in a news release Friday.

Illinois State Treasurer Dan Rutherford reacted Friday to the negative watch announcement.

“Failure to enact pension reforms will eventually bring Illinois to its financial breaking point, and it will be worse than any fiscal calamity we have seen thus far in this state,” Rutherford said in a news release.  “Our state’s credit rating cannot afford to take another hit.”

Fitch Ratings said that Illinois’ long-term liabilities, particularly pension liabilities, are very high for a state. As of June 30, 2012, the unfunded actuarial accrued liability was reported at $94.6 billion, resulting in a 40.4 percent reported funded ratio, Fitch Ratings said.

Illinois House of Representatives Minority Leader Tom Cross also responded to the downgrade announcement.

“Fitch’s downgrade of our bond rating is embarrassing and may cost the state more money—money that we clearly do not have.  How many more times do we have to be downgraded to prompt action in the General Assembly?  I have worked and will continue to work with other members in the House and Senate to pass meaningful pension reform.”

Rutherford criticized Gov. Pat Quinn, noting that it’s been two years since a 66 percent income tax increase was passed at Quinn’s request. The income tax increase was billed as a way to solve the state’s financial woes, but Rutherford said money matters have only gotten worse.

“In the past decade, the state’s bonded debt has nearly tripled.  Illinois’ debt is colossal and growing-- our debt obligations now exceed $200 billion. It is estimated that the failure to address the state’s pension liability is costing the state at least $17 million per day.  It is beyond irresponsible to let this continue.  The state needs to reign in the pension escalation and not use long-term borrowing as a ‘solution’ to this problem.” 

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