The State of Illinois’ (Baa2 negative) credit rating is vulnerable to further downgrades as “grand bargain” talks to resolve an almost two-year budget impasses have broken down, and intensifying liquidity pressures have tripled the state’s chronic backlog of unpaid bills to a record $13 billion, Moody’s Investors Service says in a new report.
“Illinois is at a critical juncture and its leaders must choose between further credit deterioration and drift without compromise, or the potential for stabilization. With a budget consensus, Illinois could quickly secure its financial position,” said Ted Hampton, a Moody’s Vice President – Senior Credit Officer.
The report, “Illinois (State of): Record Bill Backlog Signals Critical Juncture for State’s Leaders,” notes Illinois is the lowest-rated state and is seven notches lower than the median Aa1 state rating. Illinois’ credit weakness incorporates very large unfunded pension liabilities, the two-year political standoff, and its long-running reliance on payment deferral to manage operating budget imbalances.
The state’s bill backlog reached a record $13 billion on March 20, according to the state comptroller, and if no agreement is reached it could approach $28 billion by the end of FY 2019. The lack of an agreement to raise revenue, which is at the center of the state’s fiscal impasse, means that Illinois taxes and other revenues are insufficient to cover its operations.
Failure to reach a consensus before the current legislative session adjourns on May 31 would signal political paralysis, leaving Illinois on a path toward unsustainable fiscal challenges that will heighten the risk of creditor-adverse actions. These could include borrowing from debt service funds, depleting available non-operating cash, or prioritizing core operating needs over debt service.
While the state’s growing liquidity pressures have not yet impacted its ability to pay bondholder debt, the state’s chronic underfunding and payment deferral is running into political and legal limits, notably at the state’s public universities, where Illinois has appropriated $1.5 billion less than it normally would have.
While Illinois’ current fiscal year operating deficit is $5.7 billion, the state could quickly begin stabilizing its finances once budget balancing measures have been reached. Liquidity would be promptly restored because Illinois’ financial pressures have been driven by gridlock, rather than economic conditions beyond the government’s control.
And while the “Grand Bargain” appears to be stalled in the legislature, Moody’s believes the revenue measures in the deal, combined with spending restraints that keep payment deferrals from recurring, could improve Illinois’ financial prospects.