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