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 Moody's Investors Service cut the state's general obligation bond
rating one notch to Baa1 with a negative outlook on Thursday. The
move occurred three days after Fitch Ratings dropped Illinois to
BBB-plus.
Both ratings are now just three steps above the "junk" level.
Moody's cited the potential that Illinois' financial position could
weaken further due to an impasse between the state's Republican
governor and Democrats who control the legislature that has left
Illinois without a budget for the fiscal year that began on July 1.
"What we are seeing is the very real possibility of deterioration as
the finances weaken with no plan in place," said Moody's analyst Ted
Hampton.
The downgrade by Moody's, which affects $26.8 billion of GO bonds,
also pointed to Illinois' inaction on its huge $105 billion unfunded
pension liability. An Illinois Supreme Court ruling in May voided a
law aimed at reducing that liability by cutting benefits, leaving
the state limited options for dealing with the problem.
Worsening pension problems and a growing pile of unpaid bills could
result in a further downgrade, Moody's cautioned. Illinois' bill
backlog stood at $7 billion on Thursday, according to the state
comptroller.
The downgrade by Moody's marked the 17th by major credit rating
agencies for Illinois since 2003 and the second under Governor Bruce
Rauner, a political newcomer who took office in January with an
agenda to turn around the state's sagging finances.
A spokeswoman for Rauner said the latest downgrade confirms his
contention the state needs pro-business and structural reforms that
Democratic lawmakers have rejected.
Democrats, in turn, pointed the finger of blame at Rauner.
"Since Governor Rauner has taken office, revenue is down, the bill
backlog is up, services are cut, jobs growth has slowed and now our
credit rankings are lower," said Rikeesha Phelon, a spokeswoman for
Senate President John Cullerton.
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Even before this week's downgrades, Illinois had the lowest credit
ratings among the 50 U.S. states. Ratings histories from the three
major credit rating agencies indicate few states have ever had their
GO ratings fall below the A level.
Robert Amodeo, a portfolio manager at Western Asset in New York,
said bond investors are frustrated by the lack of progress in the
fifth-largest U.S. state. Still, Illinois is contemplating a return
to the municipal bond market this fiscal year after an absence of
nearly 1-1/2 years.
"They will find a clearing level even at triple-B, but they will be
penalized for it," Amodeo said.
Illinois has been paying a hefty market penalty for a while. Its
so-called credit spread over Municipal Market Data's benchmark yield
scale for triple-A-rated bonds is 190 basis points for 10- and
30-year debt.
Moody's also downgraded Illinois' sales tax revenue bonds to Baa1
from A3 and cut the rating on state appropriation dependent
Metropolitan Pier and Exposition Authority bonds to Baa2 from Baa1.
(Additional reporting by Dave McKinney in Chicago; Editing by Bill
Rigby and Matthew Lewis)
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