CHICAGO Illinois paid the price for its ongoing budget impasse on Thursday with both S&P Global Ratings and Moody's Investors Service dropping the state's general obligation credit ratings to one step above junk.
The rating downgrades came a day after Illinois’ spring legislative session ended without a budget deal because of continued partisan bickering between the Democrat-led legislature and Republican Governor Bruce Rauner. The state’s 2018 fiscal year begins on July 1.
"The rating actions largely reflect the severe deterioration of Illinois' fiscal condition, a byproduct of its stalemated budget negotiations, now approaching the start of a third fiscal year," S&P analyst Gabriel Petek said in a statement.
"Unrelenting political brinkmanship," Petek said, poses a threat to the timely payments for core state priorities, which include debt service on bonds.
S&P cut its rating on $26.3 billion of bonds one notch to BBB-minus, the lowest it has rated any state, and warned that Illinois could sink to the junk level unless it passes a budget that addresses a gaping structural deficit.
Moody's downgraded Illinois to Baa3 from Baa2, citing the prolonged political impasse that has impeded progress in dealing with a nearly $130 billion unfunded pension liability and fueled growth in unpaid bills now approaching $15 billion, equal to 40 percent of the state's operating budget.
Moody's warned that extending the impasse "would signal further pressure on the state's credit position."
"But the state's credit could stabilize at the current level in the event of a political consensus that more closely aligns revenues and spending, without relying on unsustainable fiscal measures," Moody's said in a statement.
Illinois, already the lowest-rated U.S. state, is limping toward the June 30 end of an unprecedented second-straight fiscal year without a complete budget.
Illinois state has been operating under court-ordered spending, stopgap budgets, and ongoing appropriations mandated by law. That has ballooned the amount of unpaid bills, delayed $1.1 billion in payments to schools, severely underfunded state universities, and put many social services providers on life support.
Rauner spokeswoman Eleni Demertzis blamed House Speaker Michael Madigan and his fellow Democrats for the credit downgrades.
"Madigan’s majority owns this downgrade because they didn’t even attempt to pass a balanced budget, get our pension liability under control, and other changes that would put Illinois on better financial footing," she said.
A lower credit rating typically increases the cost of borrowing money.
Illinois has now been downgraded by major credit rating agencies eight times since Rauner took office in January 2015.
Other state debt was also hit with downgrades. The ratings on Build Illinois sales tax revenue bonds fell to AA-minus from AAA with S&P, and to Baa3 from Baa2 with Moody's. Ratings for Chicago-based Metropolitan Pier & Exposition Authority debt were dropped to the junk levels of BB-plus with S&P, and Ba1 with Moody's.
Illinois is rated BBB by Fitch Ratings.
Records from S&P, Moody's, and Fitch dating back about half a century or more show no states rated junk.
(Reporting by Karen Pierog and Dave McKinney; Editing by Matthew Lewis and Leslie Adler)