Illinois' bond ratings fall amid political impasse

[June 10, 2016]  By Karen Pierog
 
 CHICAGO, June 9 (Reuters) - A long-running political battle in Illinois is pushing the state's credit ratings closer to the "junk" level due to strained finances and unaddressed pension problems.

Standard & Poor's dropped Illinois' general obligation bond rating by one notch to BBB-plus with a negative outlook on Thursday, citing the state's weakened finances due to "mismanagement."

That followed a downgrade of Illinois' rating to Baa2, just two steps above "junk," by Moody's Investors Service on Wednesday. Fitch Ratings kept the state's rating at BBB-plus, which is three steps above "junk." But Fitch warned on Thursday of a downgrade within the next six months if Illinois fails to address its "chronic and growing financial imbalance."

An impasse between its Republican governor and Democrats who control the legislature has left Illinois as the only U.S. state without a complete budget 11 months into fiscal 2016. Court-ordered spending and ongoing and stopgap appropriations have allowed Illinois to keep operating.

There is no deal in sight on a budget for fiscal 2017, which begins on July 1.

A spokeswoman for Governor Bruce Rauner blamed Democrats and long-time House Speaker Michael Madigan for the rating downgrades. Madigan in turn blamed Rauner's "reckless decision" to create a crisis to further the governor's pro-business and union-weakening agenda.

S&P credit analyst John Sugden pointed to the duration of the state's "mismanagement" for impeding the state's ability to address its long-term liabilities, which include a $111 billion unfunded pension liability and a projected $5 billion operating budget deficit.

Previously, S&P had dropped only three states into the low-investment grade triple-B level: California in 2003, Massachusetts in 1989 and Louisiana in 1988.

A further cut in Illinois' ratings to Baa3 by Moody's or BBB-minus by S&P would trigger the termination of swap agreements used to hedge interest-rate risk on $600 million of variable-rate debt - a move that could cost the cash-strapped state $155 million as of April 30.

The Rauner administration recently hired consultants to help the state disentangle from the swaps.

Illinois has the lowest credit ratings among the 50 states and has had to pay a big interest rate penalty to sell its bonds. The state is planning to sell $550 million of general obligation bonds on June 16. (Editing by James Dalgleish and Matthew Lewis)

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