* Reuters…

Moody’s Investors Service cut Illinois’ credit rating by one notch to Baa2 with a negative outlook on Wednesday, citing a political stalemate that has prevented the state from addressing its budget imbalance and big unfunded pension liability.

The downgrade to just two steps above the “junk” level affects about $26 billion of Illinois’ general obligation debt, as well as $2.75 billion of sales tax revenue bonds. […]

“The state’s structural budget gap equals at least 15 percent of general fund expenditures, if the state’s underfunding of pension contributions is included,” Moody’s said in a statement.

It added that without a budget plan to offset a revenue loss from 2015’s rollback of income tax rates, Illinois’ chronic backlog of unpaid bills could reach prior peak levels of about $10 billion in the coming months.

* From Moody’s…

Moody’s Investors Service has downgraded the State of Illinois’ general obligation (GO) rating to Baa2 from Baa1, affecting approximately $26 billion of debt. In connection with this action, we have also downgraded the rating on bonds connected to the state’s GO credit. Build Illinois sales tax revenue bonds, of which $2.75 billion are outstanding, were also downgraded one notch to Baa2. Subject-to-appropriation bonds, primarily convention center expansion bonds sold by the state’s Metropolitan Pier and Exposition Authority ($2.7 billion outstanding), were downgraded to Baa3 from Baa2. We have assigned a Baa2 to the state’s planned issuance of $550 million of General Obligation Bonds, Series of June 2016, which are scheduled for a competitive sale on June 16. The outlook associated with all of these ratings remains negative.

The rating downgrade reflects continuing budget imbalance due to political gridlock that for more than a year has kept Illinois from addressing revenue lost due to income tax cuts that took effect in January 2015. The state’s structural budget gap equals at least 15% of general fund expenditures, if the state’s underfunding of pension contributions is included. If this gap continues into a significant portion of the coming fiscal year, it will put pressure on operating fund liquidity and add to an already sizable bill backlog. We project that the backlog will surpass prior peak levels (about $10 billion) in coming months, in the absence of a consensus on a budget that offsets the loss of revenue from the 2015 tax cuts. The potential for economic underperformance or unplanned liquidity demands heightens the risk of further financial weakening. Illinois benefits from a large and diverse economic base, legal provisions that ensure continued payment on debt even with no enacted budget, and powers common to US states, such as freedom to increase revenues or constrain spending. However, the long-running partisan standoff is impeding Illinois’ ability to exercise these powers or to make progress addressing unfunded retiree benefit liabilities that far exceed those of other states.

Rating Outlook

A negative outlook is consistent with the potential for additional credit weakening after an extended impasse that has left the state increasingly vulnerable to adverse revenue trends, unplanned liquidity demands, and increasingly underfunded retiree benefit plans.

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

Persistent and growing structural imbalance that leads to reduced liquidity and continuing growth in payment backlog

Failure to enact legislation providing for payment on subject-to-appropriation obligations

Continued increases in unfunded pension liabilities and indications of unwillingness to allocate sufficient resources to retiree benefits

*** UPDATE 1 ***  Rauner administration…

“When the General Assembly adjourned without passing a balanced budget, the Administration warned the super majority in the legislature there would be consequences. This report underscores the need for real structural changes to repair the years of unbalanced budgets and deficit spending by the majority party on Illinois’ finances. Every rank-and-file Democrat who blindly followed the Speaker down this path is directly responsible for the downgrade.”

*** UPDATE 2 *** From the Illinois Republican Party…

“Mike Madigan caused this credit downgrade. He has been driving Illinois into a financial ditch for three decades and just led the charge to increase Illinois’ debt by another $7 billion. Governor Rauner has been pushing for reforms that would grow our economy, balance the budget, and save the pension system since Day One, but Mike Madigan has used every tool available to him to block financial reforms that will help this state. Mike Madigan owns this credit downgrade.” – Illinois Republican Party Spokesman Steven Yaffe

*** UPDATE 3 *** Press release…

Illinois State Treasurer Michael Frerichs today released the following statement after Moody’s decision to lower Illinois’ credit rating for the second time since the budget impasse.

“This credit downgrade is disappointing because it is avoidable,” said Frerichs. “Illinois remains a good investment, but the focus on non-budgetary items is driving up the cost of government. Higher interest rates when we borrow money mean fewer dollars for teachers, child care workers, and others who serve our most vulnerable.”

“I continue to urge Governor Rauner and the Illinois General Assembly to put their differences aside and get a budget in place before more people are hurt.”

Bonds are a tool the state uses to borrow money. The Treasurer’s Office receives and invests the proceeds of the bond sale. The lower a state’s credit rating, the higher the interest rate on the loan. Interest payments will easily exceed current investment yields.

Illinois’ General Obligation debt remains a sound investment because the state’s constitution ensures that bond holders will be repaid. However, repeated downgrades weigh heavily on how individuals and investors perceive Illinois’ economic and political climate. Negative perceptions never are beneficial nor productive.