(Bloomberg) — For the past two years, nearly Illinois Gov. Bruce Rauner’s entire time in office, his state was locked in a political paralysis that battered its universities, left contractors waiting to be paid and undermined its standing on Wall Street.
Then on Thursday, faced with the risk of becoming the only U.S. state with a junk bond rating, Democrats who control the legislature and almost a dozen of the governor’s fellow Republicans voted to override his vetoes of a $36 billion spending plan and across-the-board tax hikes, enacting a budget for the first time since mid-2015.
“If we don’t have a budget, with virtual certainty, we will go to junk status,” said Rep. David Harris, a Republican who broke ranks with the governor. “At least with a budget, we hold off.”
The resolution will ease the cash-flow crisis that threatened to halt payments to pensions, schools and government workers. It will allow the state to borrow money to pay down a record pile of unpaid bills that tripled to $15 billion during the impasse. Social service providers and universities starved of aid will get some relief. And Illinois will have an actual spending plan for the next 12 months, instead of haphazardly running deeper into the hole by spending more than it’s taking in because of court orders and continuing appropriations.
After the deal came together over the last week, with votes during the weekend and on the Fourth of July holiday, Illinois bond prices rallied on signs that the elected leaders would finally tackle the government’s long-building financial strains. On Friday, the state’s bonds were the most actively traded municipal securities, with taxable Illinois bonds due in 2033 rising to an average of 96.8 cents on the dollar, up from 91.5 cents on June 30, according to data compiled by Bloomberg. That pushed the yield down to 5.4% from 5.9%.
The House of Representatives on Thursday followed the Senate by approving the budget bills despite Rauner’s objections that it would unduly burden residents by raising their taxes. House Speaker Michael Madigan, a Democrat, praised the end of a “destructive” impasse while noting there’s still work to do.
Even though it’s over, the risks to the state may not be. While officials clashed over the budget, the state’s obligations to its deeply underfunded pensions grew to about $130 billion. On Wednesday, Moody’s Investors Service, in anticipation of the successful override, said it could still downgrade the state over the next few months, citing potentially optimistic revenue assumptions and the massive retirement fund debts.