Ailing Illinois Gets S&P Downgrade to A-Plus

CHICAGO — Illinois’ credit took a second hit this week as Standard & Poor’s yesterday dropped the state’s general obligation rating out of the double-A category, downgrading it to A-plus from AA-minus due to a deteriorating balance sheet and lack of progress in addressing budget problems.

The rating agency also warned of further action down the road by assigning a negative outlook. Illinois is now alone among states rated by Standard & Poor’s at the A-plus level. Only California is rated lower by one notch at A, also with a negative outlook. Moody’s Investors Service downgraded the state to A2 from A1 on Tuesday, and assigned a negative outlook. Fitch Ratings rates the credit A.

The state has about $19 billion of GO debt outstanding.

“The downgrade reflects what we view as the state’s deteriorating liquidity and financial position,” Standard & Poor’s analyst Robin Prunty said. “Illinois failed to address its fiscal 2009 deficit, which was carried into fiscal 2010. Similar to many other states, revenues are performing below originally forecast levels.”

Analysts took the state to task for its reliance on nonrecurring revenue streams to help plug a $12 billion deficit in the fiscal 2009 and 2010 budgets and raised concerns over whether some of those plans would come to fruition.

State finance officials have said $2 billion in debt restructuring for budget relief is temporarily on hold. Other one-time maneuvers in the budget included the issuance of $3.5 billion of pension notes to cover a portion of the state’s 2010 pension payment and payment of $3.8 billion in 2009 bills was pushed off a year.

Illinois’ faltering revenues have strained liquidity as unpaid bills mount, further contributing to Standard & Poor’s decision to act on the rating.

With $2.25 billion of cash-flow certificates that must be repaid before the end of fiscal 2010 on June 30, Gov. Pat Quinn wants to borrow more to pay a backlog of more than $3 billion in bills. Comptroller Dan Hynes, whose approval is needed for cash-flow issues, last week refused to sign off on a $500 million borrowing plan.

With the absence of stringent constitutional or legal limitations restricting its ability to raise revenues, the state has the power to lift some of the fiscal strain, but the political will is lacking, analysts said.

“Its willingness to implement difficult and politically unpopular measures to restore budget balance is questionable in our view,” analysts wrote. “The absence of recurring solutions in the next year to deal with the current budget challenges … will likely result in a further downgrade of Illinois.”

Illinois this week sold $155 million of sales tax-backed bonds rated AAA by Standard & Poor’s and will sell another $375 million next week. The pension bonds are slated for January. The state also is planning to sell up to $500 million of qualified school construction bonds in January and $750 million of new-money GO taxable Build America Bonds in February.

Quinn’s budget spokeswoman, Kelly Kraft, blamed the downgrade on prior mismanagement and the economy and called for cooperative efforts to address the state’s fiscal crisis.

“The Quinn administration has called for action by proposing budget cuts, borrowing, revenue increases, and help from the federal government. However, Gov. Quinn cannot act alone. He needs support from his fellow constitutional officers as well as the General Assembly to enact solutions to the state’s operating deficit,” she said.

The Moody’s downgrade is also now taking a toll on other state-related credits as the rating agency moved late Wednesday to place the state’s public higher education institutions and their collective $2.4 billion of rated debt on the watch list for possible downgrades.

The action affects Eastern Illinois University’s A2 rating, Governors State University’s A3 rating, Illinois State University’s A2 rating, Northeastern Illinois University’s A3 rating, Northern Illinois University’s A2 rating, Southern Illinois University’s A1 rating. Western Illinois University’s A2 rating, and the flagship University of Illinois’ Aa3 rating.

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