Illinois’ credit rating could move even closer to “junk” if its already large pension liability and budget deficit grow, Moody’s Investors Service said on Tuesday.
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. […]
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.
When Moody’s Investors Service downgraded Illinois’ credit rating in October, Illinois earned not only the distinction of having the lowest credit score of any state (it had had that for some time) but also became the first state to receive a rating below single-A.
But what does that mean and how can Illinois get out of last place? Can Illinois sink even lower on the credit scale, to a point that investors don’t want to buy our bonds?
“There is no floor for U.S. state ratings, despite states’ inherent credit strengths and typically very high ratings,” Moody’s VP-Senior Credit Officer Ted Hampton says. “The majority of states are rated either Aaa or Aa1, and this concentration at the top of our rating scale reflects states’ powers – such as the ability to cut general spending – and positive features that include prudent governance practices, moderate debt burdens, and stable, diverse economies.”
A month after dropping Illinois to a rating of Baa1 negative, Moody’s has released an FAQ document that explains why Illinois fell into its bad credit situation and how it can rebound. Moody’s succinctly spells out the causes of the state’s credit decline: “governance weaknesses, bill payment deferrals, chronic structural budget gaps, and soaring unfunded pension liabilities.”
Subscribers already have my take, but the full report is here.