CHICAGO — Moody’s Investors Service on Thursday warned Illinois that its A1 general obligation rating is at risk for a downgrade due to escalating strains from massive pension obligations, reliance on one-times revenues, and an increasing debt load amid a fragile economic recovery.
Moody’s revised its outlook on the state’s $25 billion of GOs and other related debt to negative from stable. A downgrade would give the state the distinction of holding the lowest Moody’s rating among states. California is the only other state currently rated at A1.
The rating agency last downgraded Illinois on June 4 when it lowered its rating to A1 with a stable outlook from Aa3 with a negative outlook, marking the latest in series of negative actions that began in April 2009.
Moody’s analysts blamed the June downgrade primarily on the state’s reliance on one-time revenues to deal with a $12 billion deficit, the decision to delay payment of $6 billion in bills, the size of the state’s pension obligations, and lawmakers’ failure to address how to cover a nearly $4 billion fiscal 2011 pension payment.
The outlook revision on Thursday comes after the state’s recent release of its audited fiscal 2009 financial results that showed the state closed out the fiscal year ending June 30, 2009 with a $7.7 billion deficit in its general fund, a significant increase. “It was a really striking audited result,” said Moody’s analyst Edward “Ted” Hampton.
The audited results and growing concerns over the state’s ability to address its pension obligations and a growing debt load also contributed to the action. “There hasn’t been a development sufficient to tip the scale one way or another since the last downgrade, but what we are saying is we see significant risks on the horizon that could push the state’s credit rating lower,” Hampton said.
The state could avoid a downgrade if it forgoes one-time revenues to cover recurring expenses and moves towards structurally balancing its budget and better manages it pension obligations. The state closed out fiscal 2009 with an unfunded pension liability of $62.4 billion, for a funded ratio of 50.6%.
Gov. Pat Quinn, who is locked in a tight re-election battle in the November election, said the Moody’s action underscores the need for the General Assembly to agree to raise revenues and issue bonds to cover the state’s 2011 pension payment. Lawmakers refused to raise the income tax or to authorize a pension borrowing before adjourning this past spring.
“The Quinn administration continues to call on the General Assembly to enact solutions to the state’s operating deficit by working with him to create jobs, reduce spending, approve responsible borrowing strategies, and increase revenue,” a statement from state debt manager John Sinsheimer read.
The state has no near-term general obligation issuance plans after completing a borrowing spree throughout much of the year to raise new money to fund a $31 billion capital budget, restructure and refund debt, and cover the state’s fiscal 2010 pension payment.
The state will name a finance team on Monday to lead its up to $1.75 billion tobacco bond sale slated for this year to provide budgetary relief. Quinn is expected to again press lawmakers after the November election to approve a $3.8 billion GO issue to cover the 2011 pension payment. If the pension issue is not approved, the state would have to cut its budget or skip its payment.
The state’s strengths includes its wealthy and diverse economy, ability to raise revenues and reduce expenditures and tap non-general accounts that hold a healthy $8 billion in funds. Debt service has a statutory prioritization on state revenues.
Fitch Ratings assigns an A and a negative outlook to the state’s GO debt and Standard & Poor’s rates the state A-plus, but has the credit on negative watch.
