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Moody’s warns Illinois

Wednesday, Nov 25, 2015 - Posted by Rich Miller

* Reuters

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.

* Reboot

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.

Thoughts?

       

28 Comments
  1. - Keyrock - Wednesday, Nov 25, 15 @ 10:48 am:

    Well, Ty, is that what you wanted?


  2. - Oswego Willy - Wednesday, Nov 25, 15 @ 10:51 am:

    Perspective?

    Candidate Rauner stated how Pat Quinn was “killin’, just killin’ Illinois’ business climate, including placing the blame on Governor Pat Quinn for 13 credit downgrades.

    Governors Own.

    Gov. Rauner has made it clear in one starement he doesn’t worry about downgrades, nor does he, Governor Rauner, feel it’s his responsibility to credit ratings.

    The Big Chair is a hot seat, even if you ignore the heat you put in others that you face now.


  3. - DuPage - Wednesday, Nov 25, 15 @ 10:59 am:

    Moody’s sights the “22% income tax revenue reduction as a negative factor. Rauner said he did not need that revenue. We see where he has taken the state, heading right down the drain.


  4. - Dee Lay - Wednesday, Nov 25, 15 @ 11:01 am:

    “Maybe sometimes you gotta be irresponsible to be responsible. If a political solution really doesn’t produce a favorable outcome, maybe you really need a market solution. And a market solution, I don’t mean bankruptcy, I mean actually talking down the state rating even further so the state’s bonds essentially become below investment grade. And it drives up the borrowing cost to the state and all of us to a significant level enough that you really feel the public pressure…”

    Ty Fahner - The Civic Committee of the Commercial Club of Chicago - March 2013


  5. - Anon - Wednesday, Nov 25, 15 @ 11:03 am:

    In general the Baa1 and an even lower rating reflects the attitude of the state’s disinterest in resolving it’s budget situation and long term debt obligations.

    I don’t think there’s any added risk to the GO bonds, but what is a rating agency to do when a state is refusing to actually address it’s fiscal matters with the maturity of paying it’s bills promptly, and raising the levies required to pay it’s bills?

    There are still employees waiting on back pay that is now subject to two separate labor contracts.

    There are very small municipalities that are threatening to shut off services to state facilities for months of back payments.

    Folks might lose their health insurance because the state hasn’t paid it’s bill.

    We almost didn’t make a pension payout.

    Vendors wait months for payment for services and contracts.

    This isn’t the behavior of an organization that deserves any A rating, regardless of whether or not there’s ever been a default on a GO bond.

    This is a willful and intentional neglect of responsible fiscal management for decades led by politicians that respond to the demands of a body politic that still thinks cutting spending will solve the crisis and still wants to try to insist on unconstitutional cuts to pensions.

    This isn’t how a state with an A rating behaves. This is how a person you don’t want to do business with behaves — and that’s why Moody’s should and will continue to lower the state’s rating.


  6. - Anon221 - Wednesday, Nov 25, 15 @ 11:05 am:

    Junk bonds will favor some investors, and continue to cost our State. Besides being a “pressure point”, it is going to make some investors really happy with the interest rate on the bonds.
    http://www.investopedia.com/articles/02/052202.asp


  7. - Anonymous - Wednesday, Nov 25, 15 @ 11:06 am:

    Is this what vulture capitalism, sorry. Venture capitalism, looks like when applied to government? “We gotta run government more like a business, Harrumph!!”


  8. - skeptical - Wednesday, Nov 25, 15 @ 11:06 am:

    All part of the plan to create leverage for the union negotiations, especially on the health insurance.


  9. - Anonin' - Wednesday, Nov 25, 15 @ 11:08 am:

    It would not be a slooooooow Capt Fax holiday eve without a lot of nonsense from the ratin’agencies.
    Let’s all recall these bandits and their allies on Wall Street helped drive the world economy into the ditch — it is always appropriate why anyone there outfits are in business.

    But hey let’s play along.

    OMG how can we survive junk bond status?

    OMG no borrowin’ How will the SuperStars survive?

    There that should do it. Happy Thanksgiving to one and all


  10. - Skeptic - Wednesday, Nov 25, 15 @ 11:11 am:

    Cue the “Public Pensions are just too generous, we need to cut them” in 3 … 2 … 1 …


  11. - Norseman - Wednesday, Nov 25, 15 @ 11:11 am:

    Another consequence of the Blago/Quinn/Rauner years of state government dysfunction.


  12. - Archie Bunker - Wednesday, Nov 25, 15 @ 11:17 am:

    I suspect the problem here is that no one outside of politicians and investors understands this — or the implications here — so the warnings mean very little — if anything — to middle-class, “just fix the problem” folks. Essentially, Rauner is glad he has a majority of low-information voters — or, he’s at least counting on it — because this will mean nothing to those voters.

    Rauner is banking on the ignorance of the populace, in other words.


  13. - Facts are Stubborn Things - Wednesday, Nov 25, 15 @ 11:17 am:

    The number one problem facing the state of Illinois is the budget…something MJM has been saying almost every day for the last 7 months or ss. I think Rauner has held the budget hostage long enough to make this the issue in the 2016 legislative elections. He now needs to say I gave it all I had, but without change in the D/R legislative ratio I can not continue to insist on these reforms before we have a budget.


  14. - wordslinger - Wednesday, Nov 25, 15 @ 11:23 am:

    An obvious and foreseeable consequence to using the state budget to advance a partisan political agenda.


  15. - sparky791 - Wednesday, Nov 25, 15 @ 11:25 am:

    -Rauner is banking on the ignorance of the populace, in other words.-

    This is what I have been saying all along. As long as he puts on the carhartt and drives the beat up van many people will believe him. Sad but true.


  16. - walker - Wednesday, Nov 25, 15 @ 11:25 am:

    Ty: The last thing to put enough pressure on the voting public to effect change, would be increased bond costs. Please come back to the real world.


  17. - Dee Lay - Wednesday, Nov 25, 15 @ 11:29 am:

    Norseman: You mean the Edgar/Ryan/Blago/Quinn/Rauner years?


  18. - Cassandra - Wednesday, Nov 25, 15 @ 11:32 am:

    Sigh. And we still can’t decide who pays. So many powerful interest groups want the middle class taxpayer to bear the brunt of paying back this debt, but they don’t want to say so. Neither do the pols they support through campaign contributions.

    I note that Hillary, the presumptive Democratic presidential nominee, is talking about middle class tax cuts. Yes, cuts. Must be frustrating to local pols of both parties, but especially the Democrats, given their current agenda.


  19. - Norseman - Wednesday, Nov 25, 15 @ 11:35 am:

    === You mean the Edgar/Ryan/Blago/Quinn/Rauner years? ===

    Nope!


  20. - cdog - Wednesday, Nov 25, 15 @ 12:05 pm:

    from Rueters cite–
    “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.”

    They haven’t been paying attention. There is not an effective
    Democrat majority.

    Duh /s


  21. - cdog - Wednesday, Nov 25, 15 @ 12:09 pm:

    Hampton’s quote in Reboot –”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.”

    I guess they missed the beauty and magic of the decoy TurnAround Agenda.


  22. - forwhatitsworth - Wednesday, Nov 25, 15 @ 12:14 pm:

    === An obvious and foreseeable consequence to using the state budget to advance a partisan political agenda.===

    I’d like to add … a political MINORITY partisan agenda !


  23. - Anonymous - Wednesday, Nov 25, 15 @ 12:15 pm:

    An excellent game plan by our “business” governor. Create so much discomfort and discord that people, in despair, will give in to his wishes just to stop it all. As for pensions, since they are so generous, how’s about we just eliminate all money
    for future pensions (confiscate what is in the funds now to pay for all the state needs for everyone—-damn the workers!—-roads, bridges, etc.) and stop all payments to retirees, and put them on the dole. Would that be a better solution? Very heavy snark. The state will pay them one way or another.


  24. - Abe the Babe - Wednesday, Nov 25, 15 @ 12:56 pm:

    Slinger nails it again. The businessman, financial guru turned Governor assumed most spending was bad and benefitted D constituencies. He saw leverage and took it.

    It’s no surprise that the chop shop equity man would see an enterprise, diagnosis it’s flaws, leverage a buyout, and impose his wreckening upon the company.

    this is an ideological war and not a fiscal one.


  25. - The Historian - Wednesday, Nov 25, 15 @ 1:08 pm:

    To Norseman & Dee Lay: I think you need to agree to compromise and begin with Ryan!


  26. - Ducky LaMoore - Wednesday, Nov 25, 15 @ 1:34 pm:

    ===To Norseman & Dee Lay: I think you need to agree to compromise and begin with Ryan!===

    And leave out Quinn. Things actually improved under Pat Quinn. But maintenance isn’t sexy.


  27. - Grandson of Man - Wednesday, Nov 25, 15 @ 1:43 pm:

    If all the harm that is happening is not reason to get a budget-plus deal (budget along with, say, some workers comp reform and property tax freeze), I don’t know what is. How much harm has to happen before a doable deal is done?


  28. - Anonymous - Wednesday, Nov 25, 15 @ 2:10 pm:

    This dance requires two people. Anyone blaming just Bruce or just Mike at this point is either biased, has a financial interest, or silly. Particularly with Mike holding the current hostages.


Sorry, comments for this post are now closed.


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