CHICAGO – After two years of relative rating stability, Illinois was stung anew Monday when Fitch Ratings lowered the hammer on the state for its four-month-old budget impasse.
Fitch downgraded the state to BBB-plus from A-minus, affecting $26.8 billion of general obligation debt. Appropriation backed bonds were lowered to BBB from BBB-plus.
The outlook, previously negative, is stable at the new, lower rating.
Moody’s Investors Service and Standard & Poor’s still rate the state at the A3/A-minus level, the lowest among states. Moody’s assigns a negative outlook and Standard & Poor’s has the rating on watch. Fitch dropped the state to the A-minus level in June 2013.
All three rating agencies have issued warnings over the state’s need to tackle its budget and pension woes and the danger in delaying a solution. But they also have shown patience with the state as the General Assembly’s Democratic majority and first-year Republican Gov. Bruce Rauner were expected to sort out their differences on a fiscal 2016 budget, taxes, and policy initiatives.
That patience ended Monday.
The downgrade “reflects the deterioration of the state's financial flexibility as its budget stalemate continues deep into the current fiscal year,” Fitch wrote.
“Illinois's inability to balance its operations, eliminate accumulated liabilities, and grow reserves during a period of economic expansion leaves it far more vulnerable to the next economic downturn,” analysts added. “Once again, the state has displayed an unwillingness to address numerous fiscal challenges, which are now again increasing in magnitude as a result.”
Fitch underscored the precarious shape with which the state began the fiscal year on July 1 after its fiscal 2015 budget was balanced with one-time maneuvers after four years of nominally balanced operations.
A temporary income tax partially expired Jan. 1. Rauner initially proposed a $32 billion general fund budget for fiscal 2016 while Democrats pushed through a $36 billion plan that was $4 billion short of revenue to fund it. There the two sides have remained stuck.
“The state continues to spend in most areas at the fiscal 2015 rate, which is expected to lead to a sizeable deficit,” Fitch said. “As was the case during the most recent recession, this deficit spending is likely to be addressed by deferring state payments and increasing accumulated liabilities.”
Democrats want to avert steep cuts but Rauner won’t consider a tax hike unless they agree to his policy agenda that includes a local property tax freeze with union negotiating curbs, tort and worker’s compensation reforms. Rauner argues they are necessary to get the state on sound fiscal footing and attract and keep businesses. Democrats believe they harm the middle class.
In response to the downgrade, the Rauner administration largely ignored Fitch’s concern over the stalemate.
“Fitch points out that the Illinois economy lags other states’ and has major structural challenges. Governor Rauner continues to fight for structural reforms that will put the state on a path to fiscal health, but the legislature continues to protect the failed status quo. It’s time the legislature recognizes Illinois needs transformational change,” a statement said.
The statement also cited previous comments from the governor saying: “I don’t work for the credit rating agencies. I work for the people of Illinois and we are going to have a healthy state with a booming economy, rising wages, jobs for everybody, value for taxpayers, and the best schools in America.”
With the state required to make debt service payments, payroll, and some other contractual obligations under statutes or legal orders, Comptroller Leslie Geissler Munger announced last week the state would push off its $560 million November pension payment until later in the fiscal year. She warned that the state has a $6.9 billion backlog and could close out the calendar year with an $8.5 billion bill backlog.
“As the fiscal year progresses, fewer options remain for closing the gap on a current year basis, pushing the potential solutions into fiscal 2017,” Fitch wrote.
Rating agencies want to see progress made on structurally balancing the state’s budget, especially after the Illinois Supreme Court’s May ruling voiding 2013 legislation meant to stabilize the state’s pension system and ease the growing burden of payments on the general fund.
Fitch called the state's debt burden above average and unfunded pension liabilities exceptionally high at $111 billion.
“Pensions remain an acute pressure on the state's fiscal operations,” analysts wrote.
On the positive, bondholders benefit from an irrevocable and continuing appropriation for all GO debt service, and continuing authority and direction to the state treasurer and comptroller to make all necessary transfers from any and all revenues and funds of the state. The state funds debt service in advance by setting aside 1/12 of principal and 1/6 of interest every month for payments due in the ensuing twelve months.
“Failure to enact measures that lead to ongoing budget balance beyond fiscal 2016 could lead to negative rating action,” Fitch analysts added.
Appropriation ratings impacted include the Illinois Sports Facilities Authority, sports facilities bonds, the Metropolitan Pier & Exposition Authority McCormick Place expansion project bonds; and Chicago’s motor fuel tax revenue revenues. The latter two have been hit with recent downgrades over the state budget impasse.
State Senate President John Cullerton said in response to the downgrade that he had warned of further credit hits in July.
“Now it is clear that we can no longer afford for Governor Rauner to prioritize his corporate class agenda over basic budget math and governing,” a statement said. “This lowered credit rating is just one way that we can calculate the true cost of doing business Rauner’s way. It’s time to hit the reset button an move toward a resolution.”
Illinois’ GOs were recently trading at 195 basis points over the Municipal Market Data benchmark for 10-year GO debt.
House Speaker Michael Madigan also stressed that the downgrade shows the urgency of passing a state budget.
“The lack of a resolution on the state budget and today’s downgrade are direct results of the governor’s continued focus on issues other than solving our budget crisis,” Madigan said in a statement. “Nowhere in Fitch’s statement does it suggest that the state needs to follow the governor’s agenda by weakening collective bargaining rights, reducing workers’ wages and hurting the middle class. Rather, its concerns are based on the lack of a balanced state budget.”
