CHICAGO - Standard & Poor's yesterday downgraded Illinois' general obligation bond credit one notch to AA-minus as the state grapples with a record $9 billion budget deficit that officials have warned could grow.
The rating agency in December had placed the rating on CreditWatch with negative implications due to the state's fiscal struggles and liquidity crunch with a mounting backlog of several billion dollars in unpaid bills.
"The downgrade reflects our assessment of the state's limited action to date to address what we view as a sizable budget gap for fiscal 2009," analyst Robin Prunty wrote in the report.
Illinois has outstanding $8.9 billion of non-pension GOs and another $10 billion of GO pension bonds from a 2003 issue. The rating agency also today placed on CreditWatch negative the top short-term rating of SP-1-plus on the state's $1.4 billion of GO certificates that were issued last December. That action is due to concerns over the state's liquidity.
Standard & Poor's action comes nearly one week ahead of Gov. Pat Quinn's planned release of a 2010 budget for the fiscal year beginning July 1. The state is looking at pension reforms, debt restructuring, and an income tax increase as options for closing the deficit.
Federal stimulus dollars are also expected to help. State officials have said the deficit in the current $59 billion budget and next year is at least $9 billion and could be as high as $10 billion or $11 billion.
Quinn's office could not immediately be reached for comment.
Standard & Poor's wrote in its report that it expects the budget proposal will be balanced on a cash basis, but analysts expect the state's structural problems to continue as the budget may rely on significant one-time measures and push some bill payments off until next year - a practice the state calls lapse period spending.
"In our opinion, the state has historically maintained minimal financial reserves that we believe limit flexibility. It also has very high unfunded pension liabilities that will likely create added budget pressure in the next several years," analysts wrote.
Illinois' unfunded pension liability grew to an estimated $73 billion at the close of 2008, according to recent reports. That figure represents a 40% funded ratio.
Lawmakers have hinted at skipping the state's multibillion-dollar payment owed to the pension system in 2010, but such a move would likely be accompanied by pension reforms intended to reduce the state's long-term liabilities. Quinn yesterday said he favors a two-tiered system with reduced benefits for new hires.
Standard & Poor's said the current rating reflects the state's deep and diverse economy, which is anchored by the Chicago metropolitan area; above-average income levels; and almost unlimited ability to raise tax and other revenues due to its sovereign powers and the absence of constitutional revenue-raising limits. The state also, with legislative approval, can tap into surpluses in other non-general fund accounts to fund operations.
Illinois' large deficit based on generally accepted accounting principles, pension fund liabilities, and a $24 billion unfunded other post-employment health care liability and high debt burden are factors that weigh against the state.
The rating agency assigned a stable outlook to the GO credit at the lower level. "Despite what we view as an extremely high budget gap for fiscal 2010 and limited financial reserves, we believe that the state has capacity to restore budget balance," the agency wrote.
Standard & Poor's action at least gives Quinn - who took office after the General Assembly removed Gov. Rod Blagojevich earlier this year by impeachment after his arrest in December on federal corruption charges - some political cover for difficult decisions as he inherited the fiscal mess from his predecessor.
Last December, Fitch Ratings downgraded the state to AA-minus. Moody's Investors Service has not acted on its Aa3 rating, but did strip the state of top short-term credit marks in December.