CHICAGO – Illinois will hold on to all of its low investment grade ratings – at least for now.
The remaining threat to the state’s investment grade status was removed Thursday when Moody’s Investors Service confirmed the state’s Baa3 general obligation rating, ending its review for a possible downgrade.
The action follows “passage of budget legislation that alleviates immediate liquidity pressures, moves the state closer to fiscal balance and should keep pension and other fixed costs at manageable levels at least in the near term,” Moody’s wrote.
Moody’s has now followed Fitch Ratings and S&P Global Ratings in affirming the state’s ratings following passage of a budget package with $2.5 billion in spending cuts, $5 billion in tax hikes, and $6 billion in authorized borrowing to pay down a nearly $15 billion bill backlog.
With a negative outlook on Moody's lowest investment-grade rating, Illinois still remains on the verge of falling to junk – which would mark a first for a sovereign state.
Moody’s confirmation applies to a total of $32 billion of GO and appropriation related debt.
Moody’s had put the state on review July 5 as a final override vote loomed in the House of Representatives after Gov. Bruce Rauner’s veto of a $36.1 billion budget package.
The budget passed after some GOP members broke ranks with Rauner, who opposed the tax hikes without passage of a local government property tax freeze and worker’s compensation reforms.
Moody’s action factored in the budget details but analysts still have deep concerns over implementation risks given the deep political divide among state leaders, the lack of action to deal with a $126.5 billion unfunded pension tab, or measures to keep the bill backlog in check.
“The legislation brought an end to a two-year period in which the state operated without a comprehensive budget, covering many of its expenses under court orders or consent decrees rather than standard appropriations,” Moody’s wrote. “It highlighted two of Illinois' intrinsic strengths: sovereign control over its taxing and spending policy and a diverse economy with the capacity to generate additional revenue.”
Fitch left a negative outlook on the state when it confirmed the state’s BBB rating – two notches above junk – on July 17. S&P took the state off watch, affirmed its BBB-minus rating and assigned a stable outlook on July 12.
Moody’s -- like the other rating agencies and many market analysts – warns of the state’s persistent longer term pressures, that include a massive pension burden that will keep growing in coming years, despite certain reforms on the budget legislation.
“Reducing and containing the backlog over the long term will likely depend on repeated operating surpluses, which the state has not produced in recent memory,” Moody’s said.
“The negative outlook is based on the implementation risks in the enacted budget (such as the potential failure to realize expense reductions or revenue increases anticipated under the enacted budget), expectations of continued pension liability growth and potential vulnerability to national economic downturns or other external factors,” Moody’s said.
A downgrade could occur if a structural imbalance leads to renewed build-up of unpaid bills following the issuance of debt to pay down today's backlog; if the state reduces pension contributions for near-term relief; if political paralysis results in failure to provide for timely payment of appropriation debt; or there is other unexpected adverse event.
Along with the GOs, the state’s sales tax-backed Build Illinois bonds remain at Baa3 and outstanding debt issued by Metropolitan Pier and Exposition Authority and the state's Civic Center program bonds remain one notch below investment grade at Ba1.