Illinois’ budgetary performance, a growing unfunded pension liability, and legislative inaction are all well documented. Since 2008, Standard & Poor’s Ratings Services has lowered its rating on Illinois four times The credit quality of government-related entities, such as public universities, is affected by their relative state’s support to varying degrees. Illinois’ pattern of credit deterioration over the past several years has, more recently, negatively affected the credit ratings on the state’s higher education institutions. Although the recent change in the state’s outlook to negative doesn’t necessarily equate to a change in each university’s outlook, since state appropriations make up 42% of these institutions’ revenue on average, there are negative implications.
On July 23, 2014, Standard & Poor’s revised its outlook on Illinois to negative from developing and affirmed the ‘A-‘ rating on the state’s GO 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. The outlook also reflects the implementation risk associated with recent reforms related to postretirement benefits. While we consider legislation to reform pensions and other postemployment benefits (OPEB) to be positive, if the reforms do not move forward as planned, we believe the significant fixed costs associated with postretirement benefits will escalate. Highlighting this risk is 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. What the lower court will ultimately decide is uncertain, but the Illinois Supreme Court was clear in its opinion that the health insurance subsidies the state pays for retiree health care are a benefit derived from membership in a state pension plan and are, therefore, subject to the Illinois Constitution.