CHICAGO – Illinois is at a fiscal tipping point as its unpaid bill backlog hovers near $13 billion and its budget stalemate headed toward the two-year mark, Moody's Investors Service said Thursday.
Without action soon, its rating and possibly debt service repayment is at risk, the rating agency said in a special commentary.
"State leaders are at a critical juncture, facing a choice between further credit deterioration without a compromise or potential credit stabilization with a budget agreement," Moody's wrote. The rating agency's lead Illinois analyst is Ted Hampton.
Like other rating agencies, Moody's makes clear the state is running short on time to avert another credit rating. Its general obligation rating is already the lowest among states and just two notches away from junk status at Baa2 from Moody's, in line with its counterparts at S&P Global Ratings and Fitch Ratings.
"If state lawmakers do not agree to budget-balancing measures before the current legislative session adjourns, Illinois' credit quality will keep deteriorating," Moody's said.
The backlog has surpassed a previous high of nearly $10 billion in 2010 and is projected to hit $28 billion by the end of fiscal 2019 because revenues can't keep pace with spending that continues under continuing appropriations and legal actions.
"If the state remains on this track, its prioritized payment streams, such as pension contributions and possibly even debt service, would be subject to significant risk," Moody's warned.
Without a budget agreement, the state will increasingly face worrisome choices that could impact bondholders.
"Failure to reach a consensus before the current legislative session adjourns on May 31 would signal political paralysis, leaving Illinois on a path toward unsustainable fiscal challenges that will heighten the risk of creditor-adverse actions," the report warned. After the session formally ends, a three-fifths majority is required on legislation that takes effect immediately.
The state could move to borrow from debt service funds, deplete available non-operating cash, or prioritize core operating needs over debt service.
It's a worry other rating agencies and investors have also raised. The state's stringent general obligation statutes give priority to debt service and funds are set aside monthly, but those protections could be tested as the impasse drags on and social service vendors, healthcare providers, and higher education institutions languish.
There's precedent for actions looked up on negatively by the rating agencies. Moody's noted the state's 2009 decision as it faced a mounting bill backlog and similar budget deficit to borrow $335 million for cash flow from GO bond retirement and interest fund, or GOBRI.
"In an extended political paralysis scenario, state leaders will become increasingly likely to repeat similar actions, perhaps on a grander scale…suspending this monthly set-aside practice, or borrowing from the debt service funds, could begin to appear attractive in the face of pressure to provide core services," Moody's wrote.
The state may also be tempted to divert pension funding contributions – which consume about 18% of the state's general fund spending. Moody's said it would view such a move as a "credit negative for bondholders." The state owes $8 billion to the funds this year including $6.9 billion from the general fund.
"Legislators still have time to fashion a bipartisan deal that has a positive fiscal impact, even if it lacks some of the 'Grand Bargain' elements that are politically more contentious," Moody's said. "Lack of political will, rather than a recession or other factors beyond the government's control, caused the state's budget deficits and accounts payable to soar."
Illinois Gov. Bruce Rauner, asked during a public appearance Thursday about Moody's concerns, defended his budget position and said he remains hopeful that "Grand Bargain" negotiations can get back on track. He did not directly answer the question of whether debt service repayment could be pressured if the stalemate does not end soon.
Structural budget, policy and governance changes are needed in addition to tax hikes to ensure long-term budget stability, Rauner said. "We can't keep doing what we've been doing," he said of past tax hikes.
He compared work on the "Grand Bargain" to sausage making and called it a "difficult process" but urged the Senate not to give up.
