S&P cuts state's bond rating

Ratings on Illinois's $19 billion of general obligation bonds were cut by Standard & Poor's to AA-, its fourth-highest level, after the state failed to address a budget deficit.

New York-based S&P, which cut the rating one level from AA, said the state faces a spending gap in fiscal 2010 equal to 30 percent of its annual budget, according to a statement today.

Illinois expects a $4.5 billion deficit in the fiscal year ending June 30 and a $9 billion gap in following 12 months, according to Illinois Comptroller Daniel Hynes.

"The downgrade reflects our assessment of the state's limited action to date to address what we view as a sizeable budget gap," S&P analyst Robin Prunty said in the statement.

Lower ratings can increase the cost for municipal borrowers as investors demand higher interest rates to compensate for the greater perceived risk. Illinois hasn't scheduled sales of general obligation bonds, which are backed by all state revenue.

S&P warned of a rating cut in December immediately before the state sold $1.4 billion of short-term debt to help manage cash flow. The state is about $4 billion behind in paying bills. After its action today, S&P took the state off its list of municipal borrowers under review for possible ratings cuts.

S&P said it believes the state has the capacity to balance its budget amid "what we view as an extremely high budget gap" for fiscal 2010. "The magnitude of the deficit will require difficult and possibly politically unpopular measures," the company wrote.