Illinois could be 1st state with ‘junk’ credit due to budget

capitol

CHICAGO — Illinois is on track to become the first U.S. state to have its credit rating downgraded to “junk” status, which would deepen its multibillion-dollar deficit and cost taxpayers more for years to come.

S&P Global Ratings has warned the agency will likely lower Illinois’ creditworthiness to below investment grade if feuding lawmakers fail to agree on a state budget for a third straight year, increasing the amount the state will have to pay to borrow money for things such as building roads or refinancing existing debt.

The outlook for a deal wasn’t good Saturday, as lawmakers meeting in Springfield for a special legislative session remained deadlocked with the July 1 start of the new fiscal year approaching.

That should alarm everyone, not just those at the Capitol, said Brian Battle, director at Performance Trust Capital Partners, a Chicago-based investment firm.

“It isn’t a political show,” he said. “Everyone in Illinois has a stake in what’s happening here. One day everybody will wake up and say ‘What happened? Why are my taxes going up so much?'”

Here’s a look at what’s happening and what a junk rating could mean:

WHY NOW?

Ratings agencies have been downgrading Illinois’ credit rating for years, though they’ve accelerated the process as the stalemate has dragged on between Republican Gov. Bruce Rauner and the Democrats who control the General Assembly.

The agencies are concerned about Illinois’ massive pension debt, as well as a $15 billion backlog of unpaid bills and the drop in revenue that occurred when lawmakers in 2015 allowed a temporary income tax increase to expire.

“In our view, the unrelenting political brinkmanship now poses a threat to the timely payment of the state’s core priority payments,” S&P stated when it dropped Illinois’ rating to one level above junk, which was just after lawmakers adjourned their regular session on May 31 without a deal.

Moody’s did the same, stating: “As the regular legislative session elapsed, political barriers to progress appeared to harden, indicating both the severity of the state’s challenges and the political difficulty of advocating their solutions.”

WHAT IS A ‘JUNK’ RATING?

Think of it as a credit score, but for a state (or city or county) instead of a person.

When Illinois wants to borrow money, it issues bonds. Investors base their decision on whether to buy Illinois bonds on what level of risk they’re willing to take, informed greatly by the rating that agencies like Moody’s assign.

A junk rating means the state is at a higher risk of not repaying its debt. At that point, many mutual funds and individual investors — who make up more than half the buyers in the bond market — won’t buy. Those willing to take a chance, such as distressed debt investors, will only do so if they are getting a higher interest rate.

While no other state has been placed at junk, counties and cities such as Chicago, Atlantic City and Detroit have. Detroit saw its rating increased back to investment grade in 2015 as it emerged from bankruptcy — an option that by law, states don’t have.

WHAT WILL IT COST?

Battle says the cost to taxpayers in additional interest the next time Illinois sells bonds, which it inevitably will need to do in the long-term, could be in the “tens of millions” of dollars or more.

The more money the state has to pay on interest, the less that’s available for things such as schools, state parks, social services and fixing roads.

“For the taxpayer, it will cost more to get a lower level of service,” Battle said.

Comptroller Susana Mendoza, who controls the state checkbook, agreed.

“It’s going to cost people more every day,” she said. “Our reputation really can’t get much worse, but our state finances can.”

OTHER IMPACTS?

Because the state has historically been a significant funding source to other entities, such as local government and universities, many of them are feeling the impact of Illinois’ worsening creditworthiness already.

S&P already moved bonds held by the Metropolitan Pier & Exposition Authority and the Illinois Sports Facilities Authority — the entities that run Navy Pier, McCormick Place, and Guaranteed Rate Field — to junk.

Five universities also have the rating: Eastern Illinois University, Governors State University, Northeastern Illinois University, Northern Illinois University and Southern Illinois University.