Illinois had its bond rating downgraded to one step above junk by S&P Global Ratings, the lowest grade that it’s given to a U.S. state on record, as a long-running political stalemate over a budget shows no signs of ending.
The company warned that Illinois is at risk of soon losing its investment-grade status, an unprecedented step for a state that would only deeper the government’s strain. Forgoing its usual 90-day review, S&P said Illinois will likely be downgraded around July 1, when the new fiscal year begins, if leaders haven’t agreed on a budget that starts addressing the state’s chronic deficits.
Illinois hasn’t had a full year budget in place for the past two years amid a clash between the Democrat-run legislature and Republican Governor Bruce Rauner. That’s left the fifth most-populous state with a record $14.5 billion of unpaid bills, ravaged entities like universities and social service providers that rely on state aid and undermined Illinois’s standing in the bond market, where investors have demanded higher premiums for the risk of owning its debt.
“The rating actions largely reflect the severe deterioration of Illinois’ fiscal condition, a byproduct of its stalemated budget negotiations,” S&P analyst Gabriel Petek said in a statement. “The unrelenting political brinkmanship now poses a threat to the timely payment of the state’s core priority payments.”
Illinois’s 10-year bonds yield 4.4 percent, 2.5 percentage points more than those on top-rated debt. That spread — a measure of the perceived risk — is the highest since at least January 2013 and more than any of the other 19 states tracked by Bloomberg.
The downgrade, which also dropped some debt backed by legislative appropriations into junk, came a day after Illinois’s legislature blew the deadline for approving a compromise budget by a simple majority. Now, it takes a higher threshold — three fifths majority vote in each legislative chamber — to pass anything. On Wednesday, Rauner, who is up for re-election in 2018, and Democratic House Speaker Michael Madigan, who controls much of the legislative agenda, faulted each other for the unprecedented gridlock.
The governor also held Democrats responsible for Thursday’s rating cut.