CHICAGO – Illinois took its second credit blow this week when Moody’s Investors Service dropped the state’s general obligation debt into the triple-B category Thursday as the state’s prospects for tackling its budget and pension mess dim amid a four-month-old budget stalemate.
Moody's dropped Illinois' $27 billion of general obligation down one level to Baa1 and left a negative outlook on the battered credit as analysts expect the state's fiscal ills to worsen with no end in sight to the impasse on a fiscal 2016 budget.
A total of $33 billion of debt was affected as sales tax backed bonds were also lowered to Baa1 and appropriation-backed debt issued by the Metropolitan Pier & Exposition Authority and for the Civic Center program was downgraded one level to Baa2.
"The downgrades reflect weakening of the state's financial position during 2015 and our expectation that an ongoing budget stalemate will lead to further deterioration," read the report authored by Moody's lead Illinois analyst Ted Hampton and Nicholas Samuels. "Structural budget imbalance, accounts payable, and other fiscal metrics are back-tracking, despite a favorable economic climate, leaving the state more vulnerable to the next economic downturn, barring unexpectedly strong and swift corrective actions."
The downgrade follows Fitch Ratings' move earlier in the week to drop its rating one notch to the same level at BBB-plus. Fitch assigned a stable outlook. At the A3 level, the state was the lowest rated by Moody’s. It has rated states – Alaska, California, Louisiana, Massachusetts, and Michigan -- in past decades in the triple-B category, although the actions predated Moody’s revised ratings recalibration. The current rating is three levels into investment grade territory.
"Despite the emergence of early speculative characteristics, Illinois' credit is still supported by a diverse economy, legal provisions that ensure continued payment on debt even with no enacted budget, and a broad legal ability to adjust state revenues and spending," analysts wrote.
Standard & Poor's rates the state A-minus, and has the credit on watch for negative implications.
The rating agencies had shown patience until this week after rookie Republican governor Bruce Rauner took office in January. Rauner and the General Assembly’s Democratic majority have been at loggerheads over a fiscal 2016 budget. Democrats want a mix of spending cuts and new revenue to erase a deficit estimated at between $4 billion and $6 billion. Rauner won’t consider the revenue measures without Democratic support for his governance and policy initiatives including local government union contracting curbs. Democrats refuse.
The rating agency actions this week followed Comptroller Leslie Geissler Munger’s announcement last week that the state would push off its monthly pension contribution in November and possibly December with a bill backlog that now stands at $6.9 billion. The state must continue paying some bills at fiscal 2015 levels despite lower income tax collections due to court orders and continuing appropriations.
“Any recurring measures ultimately enacted for the fiscal year that began July 1 will have a short time in which to offset the state's approximately $6 billion” deficit “caused in part by recent income tax cuts,” Moody’s said. “Payment deferrals could drive the state's balance of unpaid bills higher than the levels seen in late 2012, when the backlog approached $10 billion. Additionally, the partisan gridlock evident this year is impeding efforts to address the state's unfunded liabilities for pensions and retiree health benefits.”
The state is saddled with $111 billion of unfunded pension liabilities and its 2013 pension reforms were voided by the Illinois Supreme Court in May. “Further deterioration in key measures, such as the state's unfunded pension liabilities and amount of unpaid bills, would put pressure on the state's GO and related ratings,” Moody’s warned.
A sound pension funding plan, bill reductions, and a structurally balanced budget could help win an upgrade.
A path to achieve such a budget plan remains very clouded given leaders’ responses to the downgrades.
“The report is another confirmation that years of unbalanced budgets, deficit spending and mismanagement have damaged Illinois’ fiscal health and major, structural reforms are needed to restore it,” Rauner’s spokeswoman Catherine Kelly said in a statement.
“Under Governor Rauner’s leadership, revenue is down, the bill backlog is up, services are cut, jobs growth has slowed and now our credit rankings are lower,” a statement from Senate President John Cullerton’s spokeswoman Rikeesha Phelon read. “President Cullerton joins the chorus of Republican leaders and rating agencies in asking the governor to set aside his personal agenda in favor of a budget plan that reverses the damage and dysfunction of the last year.”
The statement was referring to recent comments from past Republican governors urging Rauner to solve the budget crisis and not tie it to his proposed governance and policy reforms.
