* You’ll recall Moody’s put the state “under review” for a downgrade to junk status just prior to the final budget override votes. Press release…

Moody’s Investors Service has confirmed the State of Illinois’ general obligation bond rating at Baa3, following passage of budget legislation that alleviates immediate liquidity pressures, moves the state closer to fiscal balance and should keep pension and other fixed costs at manageable levels at least in the near term. The rating confirmation, which also applies to state debt linked to the GO (and listed at the end of this section) ends a review for possible downgrade that began July 5. Debt outstanding for all affected securities totals about $32 billion, though not all the non-GO issues have a Moody’s rating. The state’s outlook is negative.

The budget legislation includes income tax increases that the state expects will generate about $5 billion in fiscal 2018, which began July 1. Together with internal and external borrowing provisions in the legislation, the tax increases will help contain a backlog of unpaid bills that has been hovering above $14 billion in recent weeks. The legislation brought an end to a two-year period in which the state operated without a comprehensive budget, covering many of its expenses under court orders or consent decrees rather than standard appropriations. It highlighted two of Illinois’ intrinsic strengths: sovereign control over its taxing and spending policy and a diverse economy with the capacity to generate additional revenue.

While budget passage alleviates immediate threats to the state’s credit, long-term challenges remain. The outsized net pension burden (shown above as a share of revenue compared with state medians) will keep growing in coming years, despite certain reforms included in the budget legislation. Reducing and containing the backlog over the long term will likely depend on repeated operating surpluses, which the state has not produced in recent memory. […]

Factors that Could Lead to an Upgrade

Implementation of a realistic plan to provide long-term funding for pension obligations

Progress in reducing payment backlog and adoption of legal framework to prevent renewed build-up of unpaid bills

Enactment of recurring fiscal measures that support expectation of sustainable, structural balance

Factors that Could Lead to a Downgrade

Structural imbalance that leads to renewed build-up of unpaid bills following issuance of debt to pay down backlog

Efforts to obtain near-term fiscal relief by reducing pension contributions

Political paralysis that results in failure to provide for timely payment of subject-to-appropriation debt

Difficulty managing the impacts of an economic downturn, a reduction in federal Medicaid funding or other unexpected adverse event

Well, that’s a relief. But Illinois is going to be on the edge of junk status for a long time to come.

*** UPDATE ***   Senate President John Cullerton’s spokesman John Patterson…

“It’s hard to disagree with many of the points Moody’s makes. Our balanced budget highlights our ability to self-govern and the strengths of Illinois’ diverse economy. What Moody’s seems to ask is: What took you so long? That’s a valid criticism. Looking forward, the Senate President knows more work is needed to continue to shore up our financial stability and keep Illinois moving in a positive direction.”