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Last month, the
credit rating agency downgraded Illinois just three steps above
"junk" to Baa1 with a negative outlook in the wake of a
political impasse that has left the fifth-largest U.S. state
without a budget for the fiscal year that began on July 1.
"As long as those conditions continue to deteriorate, those are
the most likely drivers of the next downgrade," Moody's analyst
Ted Hampton said on Tuesday, referring to the pension and
deficit problems.
Even if Republican Governor Bruce Rauner and Democrats who
control the legislature were to reach a compromise at this
point, it would not immediately improve the state's credit
standing. That is because any deal would not likely result in a
balanced budget halfway into the fiscal year, Moody's said in a
report.
Courts have ordered the state to fund payroll and certain
services at fiscal 2015 spending levels when revenue was higher
due to a temporary hike in income tax rates, baking a $5 billion
deficit into the budget as fiscal 2016 progresses.
Moody's said growth in Illinois' chronic unpaid bill pile, a
barometer of the state's structural budget deficit, "would
elevate liquidity risks and add further credit pressure." The
bill backlog stood at $7 billion as of Monday and Moody's
projected it could top a $9.9 billion peak reached in November
2010 if the state fails to fill its fiscal 2016 budget gap.
Illinois' $105 billion unfunded pension liability is the state's
primary credit challenge, which became harder to tackle with a
state supreme court ruling in May that rejected cost-saving
retirement benefit cuts on constitutional grounds, Moody's said.
Moody's noted there is no floor on how low state credit ratings
could sink although most are at the Aa1 or Aaa levels due to
states' ability to control spending and raise revenue.
(Reporting by Karen Pierog; Editing by Matthew Lewis)
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