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Illinois’ political back and forth is taking its toll.
Three major credit-rating agencies either downgraded the state’s debt or put it on watch on Thursday because of a protracted battle over the creation of a budget.
S&P Global Ratings dropped its assessment to BBB+ from AA-. Moody’s cut it to Baa2 from Baa1, which, according to Bloomberg, is the lowest grade for any state since Massachusetts in 1992. Both are three levels above junk territory.
The rating downgrade reflects continuing budget imbalance due to political gridlock that for more than a year has kept Illinois from addressing revenue lost due to income tax cuts that took effect in January 2015.
The state’s structural budget gap equals at least 15% of general fund expenditures, if the state’s underfunding of pension contributions is included. If this gap continues into a significant portion of the coming fiscal year, it will put pressure on operating fund liquidity and add to an already sizable bill backlog.
Fitch also issued a negative outlook on the state and issued a grade of BBB+ on the $550 million in bonds the state is planning on issuing.
In a release, Fitch said (emphasis added):
Illinois has failed to capitalize on economic growth to bolster its financial position. Rather, the decision to allow temporary tax increases to expire and the subsequent failure to develop a budget that aligns revenues with expenditures have resulted in a marked deterioration in the state’s finances during this time of recovery. Once again, the state has displayed an unwillingness to utilize its extensive control over revenues and spending to address numerous fiscal challenges.
The state faces a budget shortfall after temporary tax hikes expired. This has pitted Republican Gov. Bruce Rauner against the Democratic-controlled state Legislature in an argument about how best to fill the gap. Rauner is pushing for reforms to labor-union laws and lower property taxes in the state, which Democrats are pushing back on.
The move also comes about two months after the agencies downgraded the debt of Chicago, the largest city in Illinois, to one level above junk territory.