Illinois’ failure to pass a full budget for a second year running is likely to widen the state’s operating fund deficit and exacerbate liquidity pressures, Moody’s Investors Service said.

DALLAS – Illinois' failure to pass a full budget for a second year running is likely to widen the state's operating fund deficit and exacerbate liquidity pressures, Moody's Investors Service said Tuesday.

Such pressures would signal deterioration in Illinois' credit position, according to Moody's, which rates Illinois Baa2 after a March downgrade.

The rating agency is concerned that the state continues to spend in fiscal 2017 even without a full package of budgetary spending authorizations. Meanwhile, Illinois's general fund revenues are projected to remain flat at the fiscal 2016 level of approximately $31 billion.

"Illinois' spending is rising, even without a full package of budgetary spending authorizations, and the state projects its revenues will remain flat without any mid-year actions to raise revenues," wrote analyst Ted Hampton. "As liquidity pressure increases on the state's operating funds, the backlog of unpaid bills will almost certainly rise."

The state enacted stopgap legislation to fund education and carry other programs through the first half of fiscal 2017, which began July 1.

The "patchwork" of current-year spending authorizations, continuing appropriations, court orders and consent decrees will drive expenditures up by an estimated 12% compared with projected flat revenue, Moody's said.

Under the plan, Illinois will provide $500 million more in public education state aid than it did last year.

The stopgap plan also includes $673 million for social services programs and provides about $1 billion for colleges and universities – which represents about 85% of their aid appropriation.

Moody's calculated that the state's reliance on moving expenses from one budget year to the next has created a backlog of bills that reached $8 billion at the end of fiscal 2016 and is on track to hit $14 billion or more this year unless the government moves to align revenue and spending.

Gov. Bruce Rauner and lawmakers have said they will attempt to hash out a long term spending plan to stabilize state finances after the November elections.

"A reliance on payment deferrals to offset budget imbalance has undermined the state's fiscal position for many years," says Hampton. "With each year's revenue partly allocated to prior year expenses, achieving true budget balance is virtually impossible and operating fund liquidity is constrained."

Moody's warned that if the bill payment backlog becomes sufficiently large, the state could resort to borrowing from debt service funds for operating needs. That or similar actions would signal a deterioration in Illinois' credit position.

Moody's said that the state could offset some liquidity pressure by tapping the $9.75 billion in cash balances that state has outside its core operating funds as of March 31. The state could draw from these funds to service its general obligation debt if necessary.

Moody's has a negative outlook on Illinois. S&P Global Ratings rates the state BBB-plus with a negative outlook. Fitch Ratings rates Illinois at BBB-plus, and has the credit on negative watch.

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