S&P Not Acting Yet on Illinois Rating

CHICAGO — The Illinois budget stalemate will not trigger a Standard & Poor's downgrade -- at least for now.

The rating agency said Monday that it would not take any action on its A-minus general obligation rating despite the ongoing budget standoff between Republican Gov. Bruce Rauner and the Democratic Party-led legislature.

The lack of a budget does not have an immediate credit impact, as general obligation debt service will continue to be paid and the state has moved to ensure payment of its moral obligation debt through August, S&P said.

But a negative action could be on the horizon, warned analyst John Sugden in a comment titled "Illinois Rating Unchanged For Now, Amid Budget Impasse Between State Executive and Legislative Branches."

"In our view, the outcome of the fiscal 2016 budget deliberations will be pivotal to the state's credit trajectory given the magnitude of structural imbalance, pension spending burden, and overall liquidity," said Sugden. "[W]e could take a rating action within the next two months, even in the absence of an adopted budget if, in our view, there is limited progress in budget deliberations or if credit fundamentals weaken."

Standard & Poor's put the state's rating on CreditWatch with negative implications on May 8 after the state Supreme Court voided proposed pension reforms, saying the state's budget would play a key role in resolving the watch action.

The state entered the fiscal year July 1 without a 2016 spending plan. The House could take up a one-month budget patch this week, though Gov. Bruce Rauner has already called a temporary plan unconstitutional.

Credit analysts have warned for months a downgrade could come if Illinois lawmakers and Rauner are unable to agree to a structural fix to an estimated $4 billion budget shortfall.

"In our view, the absence of a budget, while not affecting debt service, reflects a failure in the fiscal policymaking process," Sugden said. "We have yet to see either side exhibit flexibility on their core policy objectives. And while an extended legislative session can sometimes result in an improved structural alignment or adoption of substantive policy reforms, it can also lead states to resort to budgetary gimmicks."

The state's A-minus level ratings from all three ratings agencies are the lowest of any state. Fitch Ratings and Moody's Investors Service assign the state a negative outlook.

In related news, state Comptroller Leslie Geissler Munger said Monday she would be in court Tuesday to request an order that would allow her to continue to pay all state employees on their scheduled pay dates.

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