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 Illinois has no budget yet for the fiscal year that began on July
1, and the stalemate between Republican Rauner and Democrats who run
the legislature has taken a bite out of state services. The
downgrade is the most potent sign yet that it is worsening the
state's already precarious standing on Wall Street.
The one-notch downgrade from A-minus to BBB-plus, affecting $26.8
billion of general obligation bonds, leaves Illinois as the only
U.S. state with a rating in the low investment grade triple-B level.
Fitch has previously dropped only California to that level in 2003
and 2009, according to Karen Krop, a Fitch analyst.
Rauner’s administration minimized the significance of the downgrade,
the first since he took office in January, blaming Democratic
legislators who have stymied his attempts to include
business-friendly reforms in the budget.
“Fitch points out that the Illinois economy lags other states’ and
has major structural challenges," Rauner spokeswoman Catherine Kelly
said in a statement. "Governor Rauner continues to fight for
structural reforms that will put the state on a path to fiscal
health, but the legislature continues to protect the failed status
quo."
 Senate President John Cullerton, a Chicago Democrat, called on
Rauner to drop his "corporate class agenda."
"This lowered credit rating is just one way that we can calculate
the true cost of doing business the Rauner way," said Cullerton
spokeswoman Rikeesha Phelon. "It’s time to hit the reset button and
move toward a resolution."
Rauner's top political nemesis, Democratic House Speaker Michael
Madigan, said it is time to focus solely on a state budget.
"The lack of a resolution on the state budget and today's downgrade
are direct results of the governor's continued focus on issues other
than solving our budget crisis," Madigan said in a statement. MORE
DOWNGRADES POSSIBLE
Illinois' last bond sale was in May 2014. The governor's office has
said the state intends to return to the U.S. municipal bond market
this fiscal year. Illinois continues to pay a hefty market penalty
for its fiscal woes, which include the worst-funded pensions among
the 50 states. Its so-called credit spread over Municipal Market
Data's benchmark yield scale for AAA-rated debt has widened from 140
basis points at the beginning of 2015 to 190 basis points on Monday.
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Credit rating agencies have hammered Illinois' ratings lower than
any other state in recent years.
While Fitch placed a stable outlook on the lowered rating, Illinois
faces potential downgrades to the triple-B level from Moody's
Investors Service and Standard & Poor's as well.
Monday's downgrade "is really a question of reduced flexibility,"
said Fitch analyst Krop, adding that there are doubts about the
state's "capacity to absorb unanticipated events."
Various court orders have locked in funding for payroll and certain
services at fiscal 2015 spending levels. Meanwhile, the rollback of
temporarily higher income tax rates that took place on Jan. 1, which
Rauner championed, will reduce fiscal 2016 revenue by $5 billion.
Last week, the Illinois comptroller announced November's $560
million pension payment would be delayed as the unpaid bill backlog,
a barometer of the state's structural budget deficit, increases.
"As the fiscal year progresses, fewer options remain for closing the
gap on a current year basis, pushing the potential solutions into
fiscal 2017," Fitch said.
(Editing by Matthew Lewis and David Gregorio)
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