Credit agencies threaten to punish Illinois; Would be first state with “junk” rating

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Investors are taking notice of the nearly three-year failure of Governor Bruce Rauner to get a budget passed in the General Assembly. Major rating agencies have downgraded the state’s credit rating six times since Rauner took office in January 2015.

Ratings agencies cite the unpaid bills, debt, and the insistence by the Governor to include non-budget issues in the negotiation process as reasons for concern. However, to date, Rauner appears undeterred by the possibility of a downgrade and remains adamant that his broader agenda remain part of the budget process.

The state currently ranks at triple-B credit ratings, two notches above “junk” and the worst rating among U.S. states.

According to a recent Bloomberg report, Illinois debt is trading 2.45 percentage points above benchmark – the biggest gap since Bloomberg indexes began in January 2013.

Now rating agencies are predicting further downgrades, should the state fail to pass a budget by its May 31 formal end of session, threatening the state with an official “junk” rating liability, which would be the first for any state.

But practically, what does it mean for the state’s debt to be labeled as “junk?”

Illinois, like all states and municipalities, issues bonds in order to finance public projects such as roads, schools, infrastructure, and to pay for its obligations.

John Miller, co-head of fixed income at Nuveen Asset Management, said the pool of investors willing or able to purchase debt that is rated “junk” is much smaller.

Illinois Treasurer Michael Frerichs, a Democrat, said Illinois will pay “significantly more interest” on already high costs until budget is passed.

Miller added already other municipal bond issuers in the state have paid an extra $930 million in annual debt service as a result of the budget impasse.

Moody’s, a major credit rating agency, suggested that important services and operational needs could be prioritized over debt service, while Frerichs warns of cuts to programs.

“Money, instead of going to pay bondholders, should be going into our roads, into our buildings, into our education system,” he said at a news conference.

Governor Rauner and state legislators have until today, May 31 until the end of the state’s fiscal year.

“This is sort of a do-or-die moment here with respect to the leaders in state government,” Moody’s analyst Ted Hampton said.

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