(Adds comments from governor’s spokeswoman)
CHICAGO, Aug 22 (Reuters) - The sale of up to $6 billion of bonds by Illinois to shrink its enormous unpaid bill backlog, an action the governor has yet to take, could protect the state from a credit rating downgrade to junk, S&P Global Ratings said on Tuesday.
The credit rating agency said the issuance of 12-year general obligation bonds would be cheaper than late payment penalties of as high as 12 percent that the nation’s fifth-largest state owes on much of its nearly $14.9 billion backlog of bills.
“Therefore, the state may realize net fiscal savings which we believe Illinois can ill-afford to pass up given its weakened financial position, even if the additional debt service adds incrementally to its operating deficit,” S&P said in a statement.
The bond authorization was included in a fiscal 2018 budget enacted in July by the Democratic-controlled legislature over Republican Governor Bruce Rauner’s vetoes. The budget’s enactment, which followed an unprecedented two fiscal years in which the state lacked a complete spending plan, spared Illinois from becoming the first U.S. state to be rated junk.
As a result, the state’s so-called credit spread over Municipal Market Data’s benchmark triple-A yield scale for 10-year bonds narrowed to 178 basis points from a high of 335 basis points in June.
Illinois bonds due in 12 years were yielding 3.91 percent, according to MMD, a unit of Thomson Reuters.
While the budget set a Dec. 31 deadline to sell the bonds, Rauner has been reluctant to take that step. Illinois Comptroller Susana Mendoza, a Democrat who is in charge of paying the state’s bills, has been pushing for the bonds as late-payment penalties grow by $2 million a day.
“We’re glad to see our argument vindicated by S&P,” said Abdon Pallasch, her spokesman.
Laurel Patrick, a Rauner spokeswoman, said the governor’s office is reviewing the budget to determine “best next steps.”
“As part of that review, we are considering bond issuances for both capital projects and the bill backlog,” she said in an email.
S&P said implementing the bond plan would likely not improve Illinois’ BBB-minus rating, which is a step above junk.
“However, refinancing a portion of the state’s high-interest bill backlog could offer a modest layer of potential cushion to its liquidity,” the statement said. (Reporting by Karen Pierog; Editing by Matthew Lewis)