Moody's says court ruling is negative for Illinois pension reform

[July 12, 2014]  CHICAGO, July 11 (Reuters) - The Illinois Supreme Court's ruling extending constitutional protection to public sector retiree health care is a negative credit factor for Illinois, Chicago and local governments seeking to alter pension benefits, Moody's Investors Service said on Friday.

The 6-to-1 decision on July 3 allowed the continuation of class-action challenges to a 2012 Illinois law that gave the state the right to impose healthcare insurance premiums on its retired workers. The challenge centered on a constitutional provision stating that membership in any public sector pension or retirement system "shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."

The same provision in the Illinois Constitution is also the focus of lawsuits pending in Sangamon County Circuit Court against the pension reform law the state legislature passed in December. The law reduces and suspends cost-of-living increases for pensions, raises retirement ages and limits the salaries on which pensions are based.

Moody's said the ruling in the health care case could signal how the justices decide the pension reform law.

"We therefore perceive increased risk that the Illinois Supreme Court will rule the pension reform legislation unconstitutional, which would jeopardize $32.7 billion of pension liability reduction," the credit rating agency said in a report.

Illinois already has the lowest credit rating among states, with Moody's at A3. That is largely due to its huge $100 billion unfunded pension liability.

Moody's noted, however, that Illinois courts have not yet heard arguments by the state that "extreme pension funding pressure prevents the state or a local government from providing for public health and safety, a responsibility higher than adhering to pension promises."

Chicago is also subject to the constitution's pension provision and its pension funding problems led Moody's to cut the city's credit rating four notches over the past year to Baa1.

Governor Pat Quinn last month signed into law a bill aimed at shoring up two of Chicago's four retirement systems by requiring bigger contributions from the city and its workers. Instead of receiving an annual 3 percent cost-of-living hike, the law requires the bulk of retirees to get increases tied to inflation and skips increases in certain years.

Moody's said legal challenges to that law are expected. (Reporting by Karen Pierog; Editing by Dan Grebler)

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