Moody's Investors Service downgraded the State of Illinois' general obligation (GO) rating to Baa2 from Baa1, affecting approximately $26 billion of debt. According to a news release, 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.”
Moody’s finds the state's structural budget gap equals at least 15% of general fund expenditures, if the state's underfunding of pension contributions is included. The release says if this gap continues into a significant portion of the coming fiscal year, it will put pressure on operating fund liquidity and add to an already sizable bill backlog.
Moody’s projects the backlog will surpass prior peak levels -- about $10 billion -- in coming months, in the absence of a consensus on a budget that offsets the loss of revenue from the 2015 tax cuts.
“The potential for economic underperformance or unplanned liquidity demands heightens the risk of further financial weakening. "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. "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.”
Factors that Could Lead to an Upgrade
- Implementation of a realistic plan to provide long-term funding for pension obligations
- Progress in reducing payment backlog and adoption of legal framework to prevent renewed build-up of unpaid bills
- Enactment of recurring fiscal measures that support expectation of sustainable, structural balance
- Factors that Could Lead to a Downgrade
- Persistent and growing structural imbalance that leads to reduced liquidity and continuing growth in payment backlog
- Failure to enact legislation providing for payment on subject-to-appropriation obligations
- Continued increases in unfunded pension liabilities and indications of unwillingness to allocate sufficient resources to retiree benefits
Catherine Kelly, Press Secretary for the Governor, issued the following statement on the ratings downgrade:
“When the General Assembly adjourned without passing a balanced budget, the Administration warned the super majority in the legislature there would be consequences. 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.”