Illinois State Capitol
Illinois is on the brink of having its credit rating cut to junk status. On June 1, S&P Global downgraded the state’s credit to one notch above junk. The ratings agency also said it may downgrade further this summer if the state’s legislators and governor can’t agree on a budget soon. Eric Platt writes for the Financial Times:
The state’s general obligation bonds, debt often considered sacrosanct by investors, are now rated triple-B minus by S&P, its lowest investment grade.
S&P’s smaller rival Moody’s downgraded Illinois on Thursday, too, to Baa3, also a single level above junk. Moody’s cited pressure from unfunded pension liabilities to public employees. Its downgrade affected more than $31bn of debt, Moody’s said.
The ratings actions were triggered by the failure this week of the Illinois legislature to agree on a budget before the end of its spring session. That means the state is on course to start its third straight year without a spending plan.
S&P projected that the state’s budget deficit was likely to eclipse $7bn in its fiscal 2018 year, which begins on July 1.
Hit even worse were the Metropolitan Pier and Exposition Authority (McPier) and the Illinois Sports Facilities Authory (ISFA) reports Crain’s Chicago Business:
ISFA and McPier suffered worse, going from BBB- to BB+. Both are dependent on state appropriations that may or may not arrive on time. In S&P’s ratings scale, anything below BBB has “significant speculative characteristics.”
S&P accompanied its report with some harrowing language, warning that Illinois “is now at risk of entering a negative credit spiral, where downgraded credit ratings would trigger contingent demands on state liquidity, further exacerbating its fiscal distress.”
If lawmakers don’t reach a new budget deal by the beginning of the new budget year on July 1, “it’s likely we will again lower the ratings. . . .We now view (state) payment obligations as having speculative-grade characteristics.”
Bloomberg ominously reported that the rating is the lowest ever for an American state. Of course, with any debt downgrade come higher interest costs for the borrower, so the cut will not help Illinois dig itself out of the hole it has gotten in.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- Is this a Solution to America’s Pension Crisis? - July 21, 2017
- Portfolio Strategy: Looking Past the End of the Bull - July 20, 2017
- Are the Bulls Right about Netflix? - July 19, 2017