CHICAGO – Illinois has until the end of January to make headway with its budget woes before Fitch Ratings is prepared to sock it with a downgrade.
Fitch's message Friday was clear.
"Failure to enact measures that lead to ongoing budget balance would trigger a downgrade," its analysts wrote. "Successful implementation of measures to enact a structurally balanced budget and reduce accumulated budget liabilities would place the credit on a positive trajectory."
The new report comes ahead of $1.8 billion of general obligation borrowing planned by the state in October. Fitch affirmed the state's BBB-plus rating, its lowest among states, and left the rating on rating watch negative.
Fitch last downgraded the credit in October 2015 and then put the rating on watch in June, which it intended to resolve in six months depending on the state's progress in resolving its budget impasse. The state now has until late January.
"While it is unlikely that any actions taken would fully address the fiscal 2017 budget gap, Fitch will be looking for a solution that is comprehensive in its approach, addressing structural budget balance and including a plan to address accumulated liabilities," Fitch said.
Locked in partisan political gridlock that prevented passage of either a full fiscal 2016 or 2017 budget, Gov. Bruce Rauner, a Republican, and the Democrat-controlled General Assembly have passed piecemeal appropriations over the last year. That included a stopgap budget designed to get the state through January when all say they hope to reach budget and pension reform agreements with the contentious November elections behind them. The state has traditionally tackled weightier political issues like the temporary 2011 income tax increase during lame-duck sessions after an election.
Rauner's administration this week said lawmakers will face a $5.4 billion deficit when negotiations begin. The nonpartisan research arm of the legislature this summer pegged the gap at $7.8 billion. The administration said the higher number from the Commission on Government Forecasting and Accountability reflects outdated revenue figures.
The state's unpaid bill backlog now exceeds $8 billion and is expected to top a record $10 billion in the coming months. Short-term borrowing authority of between $4 billion and $5 billion could be part of the budget deal the administration and lawmakers hope to broker early next year.
With wide flexibility to cut spending and raise taxes, the state has less room to maneuver in dealing with its $113 billion of unfunded pension liabilities given constitutional protection of benefits. Lawmakers are eyeing reforms they believe will pass a legal test.
"Funding demands associated with retiree benefits will continue to be a pressure as these benefits are constitutionally protected," Fitch wrote.
The state plans to refund about $1.3 billion of GOs in a negotiated sale on Oct. 13. Bank of America Merrill Lynch and Jefferies are running the books. The state intends to return the following week on Oct. 17 with a competitive new money sale for $480 million.
The state's GOs benefit from a continuing appropriation for debt service despite the absence of a budget and statutory protections that give debt service priority status to be repaid with any available revenues. The state also prefunds debt service by setting aside one-twelfth of principal and one-sixth of interest every month for payments due in the ensuing 12 months.
In addition to affirming the state's $26 billion of GOs at BBB-plus, the agency affirmed the BBB it assigns to $431 million of state supported sports authority debt, $2.6 billion of Metropolitan Pier and Exposition Authority McCormick Place expansion project bonds, and $268 million Chicago motor fuel tax revenue bonds based on the state flow of pledged funds.
Illinois is the lowest-rated state and pays the greatest credit spread among states. On the state's most recent GO sale in June, it saw spreads of about 185 basis points to the MMD top-rated benchmark on its 10-year maturity.
Moody's Investors Service and S&P Global Ratings rate Illinois Baa2 and BBB-plus after recent downgrades and assign negative outlooks. Moody's on Wednesday affirmed the rating.
