CHICAGO - With a $7 billion borrowing spree planned in the next few months, Illinois' credit took a double-notch blow yesterday from Fitch Ratings, which downgraded the state's rating to A from AA-minus after a review of the fiscal 2010 budget that relies heavily on one-time measures such as borrowing.
The action affects $19.4 billion of general obligation bonds. Fitch downgraded the state last December to AA-minus and then in April placed the GO credit on negative watch as lawmakers and Gov. Pat Quinn sought to resolve a budget impasse. Analysts said at the time any rating action would be driven primarily by how the state acted to address its dwindling revenues and estimated $12 billion deficit.
The final $54 billion fiscal 2010 all-funds operating budget signed by Quinn earlier this month relies heavily on one-time maneuvers, including issuing $3.4 billion of debt to cover most of the state's $4 billion payment owed to its pension systems.
The budget delayed repayment of about $3 billion in bills to the next fiscal year. Quinn and lawmakers have said the state will need to come up with additional revenue by early next year.
Fitch offered a harsh assessment of the budget and its long-term impact on state operations.
"The downgrade reflects the significant scope of the budgetary problem and the failure of the state to enact a budget that fully addresses its current spending needs and its large structural budget deficit," wrote analysts Karen Krop and Richard Raphael. "The enacted budget relies heavily on non-recurring revenues, particularly the use of debt to finance current operations, which will contribute to continued difficulty in structuring a balanced budget in the future."
State budget spokeswoman Elizabeth Austin released a statement highlighting Quinn's proposals, most of which were tabled by lawmakers: "Gov. Quinn agrees that long-term structural changes are needed. He is working to accomplish that by backing pension reform, systemic cost cutting, and greater operating efficiencies. In addition, Gov. Quinn continues to fight for a much-needed revenue increase to pay the state's obligations in a timely manner and restore our fiscal health."
Moody's Investors Service lowered the state's credit one notch in April to A1. It then earlier this month placed the credit, along with $2.1 billion of A1-rated sales tax-backed Build Illinois debt and $2.26 billion of debt issued by the Metropolitan Pier and Exposition Authority, on watch for a possible downgrade just as lawmakers were voting on the new budget. Standard & Poor's downgraded the state to AA-minus in March.
Quinn - who took office early this year after the General Assembly removed former Gov. Rod Blagojevich from his post following his arrest on federal corruption charges - originally sought an income tax increase to help improve the state's fiscal balance, but the House rejected it.
Although Quinn cut $1 billion from the budget and lawmakers gave him the ability to trim another $1 billion, he resisted deeper cuts due to concerns they would devastate the state's social services network.
In addition to the pension borrowing, the budget relies on $532 million in savings from the restructuring of $2.2 billion of GO and sales tax debt and $580 million from surpluses in other non-general fund accounts that hold $6 billion.
Illinois could not afford to put off its fiscal woes with one-time measures, because it entered the current recession with little flexibility, according to Fitch. The agency said Illinois emerged late from the last recession and did little during the ensuing five years of economic growth to set up reserves or restructure its finances.
"The extent of the current fiscal problem has been clear for several months as revenue estimates were downsized; however, comprehensive solutions have been repeatedly delayed," analysts wrote. The state's unemployment rate in May was 10.3% compared to the national average of 9.5%.
Illinois' liquidity remains strained, with unpaid bills at the end of the fiscal year June 30 totaling $3.7 billion, compared to $975 million a year earlier. While general vendor payments are three months behind, the state has reduced Medicaid payments down to 30 days.
A longer-term challenge remains the state's growing unfunded pension liability. The liability has grown to an estimated $73 billion due to investment losses last year. Lawmakers did not act on Quinn's proposal to shift to a two-tier pension system with reduced benefits for new employees. A special task force will review reform proposals this summer.
According to a recent interview with debt manager Phil Culpepper, the state's borrowing plans include about $1 billion of short-term certificates for cash-flow purposes in the next month. The state also next month would restructure about $1.5 billion to $1.7 billion of GO debt, delaying $500 million in near-term principal payment to 2012 through 2017. A restructuring of Build Illinois bonds to complete the overall $2.2 billion plan will be done later in the year.
The state in late August or September would then competitively sell about $300 million to $400 million of new-money GOs to raise funds for shovel-ready projects approved in a mini-capital budget earlier this year. The program is part of the larger $31 billion capital works program signed into law by Quinn this month.
A Build Illinois sale that would also be done competitively and is not yet sized would sell in late summer to fund previously approved projects. In September or October, the state would issue, through a negotiated sale, the GO pension obligation notes that are limited to a five-year maturity.