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Illinois faces further downgrades if budget deal not reached

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(Bloomberg) — Illinois’s failure to resolve the nearly two-year political impasse over the budget could trigger further cuts to its bond rating, which is already the lowest among U.S. states, S&P Global Ratings said.

The report from the company comes as lawmakers weigh measures that would raise taxes, cut pension costs and borrow to cover a backlog of unpaid bills. The bi-partisan plan, put together by the leaders of the Senate, could stop the state’s rating from slipping further, though any upgrade wouldn’t happen during the next two years, S&P said.

Related: Illinois governor backs some of Democratic fix for pension funds

“Illinois’ fiscal crisis is, in our view, a man-made byproduct of policy ultimatums placed upon the state’s budget process,” said Gabe Petek, an analyst with S&P, which rates Illinois BBB, two steps above junk. The “distressed fiscal condition and dysfunctional budget politics now threaten to erode the state’s long-term economic growth prospects.”

Illinois has been without a full-year budget since July 2015 as Republican Gov. Bruce Rauner and the Democrat-led legislature remain at loggerheads over how to close budget shortfalls that were left after temporary tax increases expired. The deadlock has triggered rating cuts that have left investors demanding higher yields to hold its bonds instead of benchmark securities.

The senate’s leaders initially planned to hold a vote last month on the budget legislation, only to delay it after opposition from business and taxpayer groups.

The political discord has also prevented Illinois from coming up with a plan to shore up its retirement system after a previous overhaul was struck down by the state’s Supreme Court. Illinois owes about $130 billion to its workers’ pension plans, which last year had only about 38 percent of what’s needed to cover promised benefits, according to the state’s Commission on Government Forecasting and Accountability.

Senate President John Cullerton, a Democrat, said in a speech at the City Club of Chicago Monday that the cost of doing nothing would be dire and speculated on the consequences if the impasse persists until the end of Rauner’s term two years from now.

“We’re almost two years behind in paying our bills now — the next governor will be paying businesses four years late,” he said. “By then, we’ll have been downgraded to junk-bond status and no one will lend us money. The new governor will have that hung around his or her neck. I don’t want to even speculate what the tax rate would need to be to try to dig out of that hole.”


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