CHICAGO – The Illinois political dysfunction that's driven a more than six-month-old fiscal 2016 budget stalemate won't alone cause a downgrade, Standard & Poor's says in a new report.
The Jan. 7 report "Looking Past The Noise To Illinois' Fundamental Creditworthiness" delves into the reasons behind Standard & Poor's decision to maintain the state's A-minus rating. The agency recently affirmed the rating ahead of a state general obligation bond issue, removed it from creditwatch with negative implications, and assigned a negative outlook.
Fitch Ratings and Moody's Investors Service recently lowered the state's rating one notch to BBB-plus and Baa1, respectively with Fitch assigning a stable outlook and Moody's a negative one.
S&P said it incorporates Illinois' dysfunctional budget politics into the state's credit profile at the current rating level.
"As we have pointed out before, for U.S. states, a budget crisis doesn't necessarily constitute a debt crisis. We balance any concern about the drama unfolding in Springfield—including what it says about the state's actual ability to pay its debt service—against our objective of continuing to work toward a globally comparable portfolio of ratings," said analyst Gabriel Petek.
The report highlights the fact that much of the state's fiscal apparatus continues to function even without a budget in place and that GO debt is repaid through a continuing appropriation.
"The absence of a budget doesn't mean a lack of spending so much as it does unmanaged spending," Petek said.
Analysts may consider the state's fiscal woes serious, its stewardship wanting, and its liability profile among the weakest in the nation but S&P doesn't believe those factors warrant a drop into the BBB category.
"Ultimately, politics and not the state's economic and tax base fundamentals lay at the heart of its current crisis," says Mr. Petek. "We have determined, based solely on the developments described herein, that no rating actions are currently warranted."
Rating agencies have warned that as the budget impasse between Republican Gov. Bruce Rauner and the legislature's Democratic majorities continues, time is running short to address a $4 billion to $5 billion deficit.
Democrats want a mix of tax hikes and cuts to resolve the gap but Rauner won't support tax hikes unless Democrats agree to several of his governance and policy initiatives. He argues they are crucial to the state's economy. Democrats oppose those proposals and want the budget tackled separately.
