“At this point, it’s not even clear that Fitch’s downgrade prods politicians toward action given that they have watched Illinois’ credit ratings tumble for years with little reaction,” said Tom Schuette of Gurtin Municipal Bond Management.

CHICAGO — Illinois lawmakers will return to work after another rating downgrade, with warnings of more to come as the state enters its 19th month without a full budget.

Whether Fitch Ratings' one-notch downgrade to BBB on Wednesday will spur action is unclear. Fitch also warned that a further hit is coming by the start of the next fiscal year July 1 without budget progress.

The state is also testing the patience of Moody's Investors Service and S&P Global Ratings as both assign a negative outlook to their triple-B ratings.

"If one of the rating agencies were to push the state's debt out of investment grade, that would have an impact, but single-notch downgrades are not going to change many people's opinions on the state," said Tom Schuette, co-head of investment research and strategy at Gurtin Municipal Bond Management.

"At this point, it's not even clear that Fitch's downgrade prods politicians toward action given that they have watched Illinois' credit ratings tumble for years with little reaction. Even the state's leaders seem to expect downgrades," he said.

The Wednesday downgrade hasn't resulted in a noticeable change in Illinois' spreads and the secondary market seems to be generally void of any Illinois GO block trades, said Daniel Berger, of Thomson Reuters Municipal Market Data. The market appeared to price in a looming downgrade last year when spreads noticeably widened.

Illinois' 10-year paper has trading in the secondary market at a 225-basis-point spread to the MMD top-rated benchmark. The 10-year last month ranged about 222 bp to 228 bp. It hit a high of 238 bp on Dec. 22, after widening from a low of 162 bp in September. Spreads jumped in mid-October, MMD data showed.

The Senate returns Tuesday and a vote may occur then on the sweeping bipartisan Senate-backed package of bills crafted break the stalemate.

The House is scheduled for session on Wednesday and the fate of the so-called "Grand Bargain," if it makes it to that chamber, is unclear.

Gov. Bruce Rauner is expected to unveil his fiscal 2018 budget mid-month.

The Senate backers of the plan – President John Cullerton and Minority Republican leader Christine Radogno -- are still aiming for a vote as soon as Tuesday, but negotiations are ongoing and so the exact timing is unclear, said Cullerton spokesman John Patterson.

"The Senate president and Senate Republican leader continue to discuss components of a compromise package," said Radogno spokeswoman Patty Schuh. The two crafted the 13-bill package and had hoped to pass it in January but intense opposition from special interest groups and concerns among some senators about pieces of the plan prompted them to hold it for further amendments in hopes of building more support.

It would authorize spending through fiscal 2017, raise more than $6 billion in new tax revenue, expand gambling, make changes to state pensions and provide teachers' pension payment help for Chicago Public Schools. It also includes various policy and governance reforms on worker's compensation, a local government property tax freeze, and local government consolidation that Rauner has demanded as part of a budget fix.

All the bills are tied together, requiring approval of the full package for any one bill to take effect.

Lawmakers may take up legislation that would authorize payment for state workers. A court hearing is set for Feb. 16 on Illinois Attorney General Lisa Madigan's recent motion asking the courts to lift an injunction that has allowed employees to be paid in the absence of a budget.

Madigan's filing has received mixed reviews with Republicans attacking the move as detrimental to "Grand Bargain" talks and others saying it could create the crisis needed to spur action. The Democratic attorney general argued that the question is ripe given the ongoing impasse and expiration of the stopgap spending plan Jan. 1.


Fitch's downgrade was not surprising, as it had warned the state to act by the end of January. Fitch kept the state on Negative Rating Watch.

The downgrade "reflects the unprecedented failure of the state to enact a full budget for two consecutive years and the financial implications of spending far in excess of available revenues, which has resulted in increased accumulated liabilities and reduced financial flexibility," Fitch's lead Illinois analyst Karen Krop wrote.

The downgrade impacts $25.9 billion of general obligation bonds. Another $3.3 billion of state-supported sports facilities, convention center, and Chicago motor fuel bonds were dropped to the lowest investment grade. The state is grappling with an $11 billion bill backlog, a $5 billion deficit, and $126.5 billion of unfunded pension liabilities.

S&P lowered the state to BBB and assigned a negative outlook on September 30.

"We could lower our rating should the state continue to demonstrate a lack of ability or willingness to adopt a long-term structural budget solution that also incorporates a credible approach to its long-term liabilities," it wrote.

Moody's Investors Service last downgraded the state on June 8 moving the rating down to Baa2 with a negative outlook.

In its last rating report Sept. 28 ahead of a state GO issue, Moody's listed as factors that could lead to a downgrade: "Persistent and growing structural imbalance that pressures liquidity and increases payment backlog; continued increases in unfunded pension liabilities and indications of unwillingness to allocate sufficient resources to retiree benefits; failure to enact legislation providing for payment on subject-to-appropriation obligations."

Rauner inherited ratings at the low single-A level when he took office in January 2015.



Rauner will lay out a fiscal 2018 budget mid-month using the same form as last year, he told the Chicago Tribune editorial board in a recent meeting. Last year he laid out two options. If a budget agreement was reached with Democrats, Rauner proposed a $36.3 billion spending plan that included some savings from cuts and reforms and new revenues from unnamed sources.

Without a budget agreement in place, state spending would be limited to $32.8 billion of revenues that are expected in the next fiscal year. That would require $3.5 billion in additional cost cutting. He asked the General Assembly to give him greater authority to cut spending absent an agreement. Democrats rejected both.



They did agree on a six-month stopgap plan in late June but it expired Jan. 1 although K-12 education spending continues through the fiscal year. Higher education and social services are the hardest hit as much of state spending is ongoing under continuing appropriations and court orders.

While saying he continues to support the Senate efforts, Rauner also told the editorial board that any final budget package must contain what considered sufficient "structural change."

The state's revenue picture continues to look bleak absent action, according to the latest data from the legislature's non-partisan Commission on Government Forecasting and Accountability outlined in its newly posted January report.

Corporate taxes are off $390 million for the fiscal year and personal income taxes are down $332 million. Through January, revenues are off $1 billion, or 5.9%. "The past month's performance did little in the way of alleviating concerns over FY 2017 revenues," the report said. The state also is now nearly $4 billion behind in state employee group insurance program payments.



The "Grand Bargain" began with 13 bills. One that raised the minimum wage was dropped and another was in a shell form to be filled in once a Rauner-appointed education commission released its recommendations for overhauling the distribution of state aid. The group released their report Wednesday calling for an additional $3.5 billion in aid over the next 10 years. The state spends about $11 billion annually.

The plan called for better compensating poorer districts that lack the property-tax bases of wealthier districts without cutting aid levels for wealthier districts, meaning new revenue would be needed. The plan fell far short, however, of the detail needed for legislation so it's unclear whether it will remain a part of the "Grand Bargain" package.

The fiscally distressed Chicago Public Schools is banking on increased aid from an overhaul. The state's six-month stopgap budget provided CPS with an additional $130 million in poverty grants but that was just for fiscal 2017.

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