In the midst of the state’s ongoing budget impasse, Moody’s Investors Service downgraded Illinois’ credit rating to two steps above the “junk” level Wednesday.
The credit rating service downgraded Illinois’ general obligation rating from Baa1 to Baa2, affecting roughly $26 billion in debt. The service also downgraded the rating of bonds connected to the state’s general obligation credit.
“The rating downgrade reflects continuing budget imbalance due to political gridlock that for more than a year has kept Illinois from addressing revenue lost due to income tax cuts that took effect in January 2015,” the Moody’s report reads.
According to Moody’s, the outlook for all the ratings is negative.
“A negative outlook is consistent with the potential for additional credit weakening after an extended impasse that has left the state increasingly vulnerable to adverse revenue trends, unplanned liquidity demands, and increasingly underfunded retiree benefit plans,” the report reads.
Governor Bruce Rauner’s office issued a statement on the downgrade Thursday, placing blame on Democrats.
“When the General Assembly adjourned without passing a balanced budget, the Administration warned the super majority in the legislature there would be consequences,” Rauner spokeswoman Catherine Kelly said. “This report underscores the need for real structural changes to repair the years of unbalanced budgets and deficit spending by the majority party on Illinois’ finances.”
“Every rank-and-file Democrat who blindly followed the Speaker down this path is directly responsible for the downgrade,” the statement added.
The Illinois Republican Party echoed the governor’s sentiments Thursday, saying “Mike Madigan owns this credit downgrade."
“Mike Madigan caused this credit downgrade. He has been driving Illinois into a financial ditch for three decades and just led the charge to increase Illinois' debt by another $7 billion,” party spokesman Steven Yaffe said in a statement. “Governor Rauner has been pushing for reforms that would grow our economy, balance the budget, and save the pension system since Day One, but Mike Madigan has used every tool available to him to block financial reforms that will help this state."
In response, Madigan blamed the governor for the downgrade.
"It's an outrage that we have gone nearly a year without a state budget," Madigan said in a statement. "This downgrade is directly attributable to Governor Rauner's reckless decision to hold the state houstage for more than a year and to create the crisis he desired. The governor's own proposed budgets are billions of dollars out of balance, and, for almost a month, a bipartisan plan to provide emergency funding for human services providers and our most vulnerable has languished on Governor Rauner's desk."
"He refuses to sign that bill because he continues seeking a state of crisis in Illinois."
Illinois State Treasurer Michael Frerichs claimed the downgrade was unavoidable Thursday and urged Rauner and other Illinois lawmakers to work together on finding a solution.
“This credit downgrade is disappointing because it is avoidable,” Frerichs said in a statement. “Illinois remains a good investment, but the focus on non-budgetary terms is driving up the cost of government. Higher interest rates when we borrow money mean fewer dollars for teachers, child care workers, and others who serve our most vulnerable. I continue to urge Governor Rauner and the Illinois General Assembly to put their differences aside and get a budget in place before more people are hurt.”
The Moody’s report also notes that Build Illinois sales tax revenue bonds were knocked down a peg to a Baa2 rating, with $2.75 billion of the bonds currently outstanding.
Additionally, subject-to-appropriation bonds, which primarily account for convention center expansion bonds sold by the Metropolitan Pier and Exposition Authority were also downgraded from Baa2 to Baa3. Those bonds currently account for $2.7 billion in outstanding debt.
The credit rating agency also assigned a Baa2 rating to the planned issuance of $550 million in GO bonds that are set for a competitive June 16 sale.
The report warns that the state’s budget gap is equal to 15 percent of general fund expenditures, if underfunding of pensions is included. The agency warns that, if the gap continues, it could force operating fund liquidity and could further add the state’s bill backlog.
Without a budget that offsets the revenue lost from 2015's tax cuts, Moody’s predicts that the state’s bill backlog will pass the previous peak level go about $10 billion in the coming months.
The report warns against “further financial weakening” given the state’s potential for economic underperformance and unplanned liquidity.
“Illinois benefits from a large and diverse economic base, legal provisions that ensure continued payment on debt even with no enacted budget, and powers common to US states, such as freedom to increase revenues or constrain spending,” the report reads. “However, the long-running partisan standoff is impeding Illinois' ability to exercise these powers or to make progress addressing unfunded retiree benefit liabilities that far exceed those of other states,” Moody’s added.
In order to improve ratings, Moody’s calls for a realistic long-term funding plan for pension obligations, progress in paying the state’s bill backlog, an adopted legal framework to prevent future unpaid bills and the enactment of fiscal measure to support “sustainable, structural balance.”
The state’s budget impasse dates back to July of last year. It has largely hinged on a battle between Rauner and Illinois democrats over the governor’s pro-business Turnaround Agenda. Last week, the General Assembly adjourned their spring legislative session without passing a new state budget.