Moody's warns of growing liquidity pressures for Illinois

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[September 01, 2016]  CHICAGO, Aug 31 (Reuters) - Illinois' failure to enact a full budget for a second straight fiscal year will exacerbate the state's operating cash crunch and could prompt borrowing from debt service funds earmarked to pay off outstanding bonds, Moody's Investors Service said on Wednesday.

An impasse between Illinois' Republican governor and Democrats who control the legislature left the state with an incomplete fiscal 2016 budget and only a six-month spending plan for fiscal 2017, which began on July 1.

A bipartisan legislative commission has projected the stopgap budget will push the state's general fund deficit to a record $7.8 billion. As a result, Illinois' chronic pile of unpaid bills is likely to balloon to as much as $14 billion, surpassing a previous high of $10 billion in 2012, according to the credit rating agency.

"If the (unpaid bill) backlog becomes sufficiently large, the state government could resort to borrowing from debt service funds for operating needs," Moody's said. "That practice, or any similar action posing a threat to the state's debt payment mechanics, would signal a deterioration in credit position."

Payments on Illinois' approximately $26 billion of outstanding GO bonds have not been affected by the impasse. Governor Bruce Rauner's office said in a statement that it "opposes any plan to borrow from debt service funds."

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Illinois, which Moody's rates Baa2 with a negative outlook, already has the lowest general obligation credit ratings among the 50 states due to its struggles with a $111 billion unfunded pension liability, a structural budget deficit, and political gridlock.

Moody's pointed to a law Illinois passed in 2009 allowing it to borrow from its GO bond retirement and interest fund to pay Medicaid providers. While the $335 million was quickly paid back with interest, the law "showed how operating fund liquidity pressure could put the state's mechanism for GO debt repayment at risk," the Moody's report said.

The rating agency also noted that some of the $9.75 billion in cash balances the state had as of March 31 in nonoperating funds could be tapped for debt service on GO bonds. (Reporting by Karen Pierog; Editing by Matthew Lewis and James Dalgleish)

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