Moody's may still lower Illinois to junk even if budget enacted

Updated 7/6/2017 8:41 AM

Illinois is at risk of becoming the first junk-rated U.S. state on record even if lawmakers overturn Governor Bruce Rauner's veto and enact a budget, Moody's Investors Service said.

The state's rating, one step above speculative grade, is "under review for possible downgrade" after Illinois's leaders failed to enact a "timely budget" and come to a political consensus over how to solve the state's financial challenges, Moody's said in an emailed statement on Wednesday. The Senate overrode Republican Rauner's veto of budget bills, including a $36 billion spending plan and tax hike, on Tuesday, and the House is scheduled to vote on override measures on Thursday.


The budget "appears to lack broad bipartisan support, which may signal shortcomings in its effectiveness once implemented," Moody's said. "So far, the plan appears to lack concrete measures that will materially improve Illinois' long-term capacity to address its unfunded pension liabilities."

The rating-company's statement came after Illinois bonds rallied Wednesday on speculation that the state's will avoid another downgrade.

Without a budget for more than 700 days, the fifth-most-populous state has run up a record $15 billion in unpaid bills and ended the year on June 30 more than $6 billion in the red. Illinois's unfunded pension liabilities have soared to about $130 billion. While Moody's expects the House to succeed in overturning the veto, it said the plan doesn't appear to address the pension shortfall, may not raise as much money as expected and will add to Illinois's long-term debt by issuing bonds to cover some of its unpaid bills.

The tax hike passed by the Democrat-controlled legislature would raise individual income-tax levies to 4.95 percent from 3.75 percent, and corporate taxes to 7 percent from 5.25 percent, generating about $5 billion, according to legislative estimates. Since baseline tax collections fell during the year ended June 30, future tax hikes may produce less money than expected, Moody's said.

The tax hike won bipartisan support in the House with 15 Republican voting for the bill on Sunday. Both chambers need a three-fifths majority to override a veto, and that same vote count was needed to pass any legislation after May 31. Only one Republican senator voted for the tax hike.

Illinois already has the worst rating of all 50 states. Moody's rates Illinois Baa3 and already had a negative outlook on the state. The "review for downgrade" signals that further analysis is needed, according to Moody's. Once an issuer is in this review process, it's typically resolved in 30 to 90 days.

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