SPRINGFIELD – House Speaker Mike Madigan's budget will bring in more tax dollars with its income tax hike if the House overrides the governor's veto, but without needed reforms, the state's bonds may still reach "junk" status, according to Moody’s Investors Service.
In a press release Wednesday, Moody's said that they've placed the state's rating "under review for possible downgrade" from its current next to junk "Baa3" status.
The Service points to "the state's failure to fully enact a timely budget for the fiscal year that began July 1, and its failure to achieve broad political consensus on how to move toward balanced financial operations."
The review also applies to several related state debt ratings: the Baa3 assigned to sales-tax backed Build Illinois bonds and the Ba1 ratings assigned to Illinois subject-to-appropriation bonds, the convention center bonds issued by the Metropolitan Pier and Exposition Authority and bonds issued under the state's Civic Center program.
Illinois has outstanding debt of about $32 billion, of which 82% is general obligation.
The decision to place the state's ratings under review for downgrade incorporates Moody's expectation that the legislature will implement revenue increases, overriding the governor's vetoes. It also addresses Illinois' most pressing credit challenges: its severely underfunded pensions and a backlog of unpaid bills, which has doubled during the past year.
Moody's says the plan lacks broad bipartisan support, which may signal shortcomings in its effectiveness once implemented. In addition, the state's baseline tax collections declined in fiscal 2017, suggesting that any tax increase may yield less revenue than anticipated in coming months.
And the state's failure to address long-term issues could be the nail in the ratings' coffin.
So far, the plan appears to lack concrete measures that will materially improve Illinois' long-term capacity to address its unfunded pension liabilities. A June 30 order from a federal judge that the state accelerate payments owed to Medicaid managed care organizations and service providers cast doubt on the state's immediate ability to keep up with its statutory pension contribution schedule while also meeting obligations for debt service, payroll and school funding. The state anticipates addressing its approximately $15 billion backlog of payments owed partly through a bond offering that probably will rank among the largest in the state's history. This component of the state's broader fiscal plan leaves Illinois not only dependent on market access to ease liquidity pressures, but also facing a significant increase in its tax-supported debt burden. Moreover, the effectiveness of the state's strategy to contain and reduce its deferred bills, once the backlog-financing debt has been issued, remains to be seen.
If Moody’s decides to downgrade Illinois, Illinois will be the first state in the nation to ever fall to junk status.
