Moody's Investors Service has lowered the rating on the State of Illinois' general obligation (GO) bonds to Baa3 from Baa2, amid a prolonged political impasse that has prevented progress on a growing pension deficit and an increasing backlog of unpaid bills. With this action, ratings of several state debt types linked to the GO rating also were lowered: Build Illinois Bonds backed by sales tax revenues, to Baa3 from Baa2; the Metropolitan Pier & Exposition Authority's McCormick Place project bonds, to Ba1 from Baa3; and the state's Civic Center program bonds, also to Ba1 from Baa3. Debt outstanding for all affected securities totals about $31.5 billion, but not all outstanding Build Illinois and Metropolitan Pier issues are rated by Moody's. The outlook applicable to the state and these associated credits remains negative.
Legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance, allowing a backlog of bills to approach $15 billion, or about 40% of the state's operating budget. During the past year of fruitless negotiations and partisan wrangling, fundamental credit challenges have intensified enough to warrant a downgrade, regardless of whether a fiscal compromise is reached in an extended session. 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. Extending the impasse, and the state's embedded operating deficit of at least $5 billion (or 15% of general fund revenue) would signal further pressure on the state's credit position. But the state's credit could stabilize at the current level in the event of a political consensus that more closely aligns revenues and spending, without relying on unsustainable fiscal measures.
The downgrade to Baa3 for Illinois' GO bonds is consistent with the state's intensifying pressure from pension liabilities; by our calculation, the state's unfunded pension liability (Moody's adjusted net pension liability, or ANPL) for its five major plans in aggregate grew 25% in the year ended June 30, 2016, to $251 billion. The current rating also acknowledges intrinsic credit strengths, primarily the state's sovereign powers over revenue and spending; a diverse and strong economic base with the long-term economic potential to provide for its liabilities, and statutory protections for bondholders, primarily requirements for monthly transfers in advance of semiannual debt service payment dates. During the past decade, the state's governance framework has allowed practices that greatly offset these strengths. After eight downgrades in as many years, Illinois' rating is an outlier among states, most of which are rated at least eight notches higher. The rating on the Build Illinois sales-tax revenue bonds is capped at the GO rating because of lack of sufficient segregation of pledged revenues from the state's operating needs. The Met Pier and Civic Center program bonds are both rated a notch below the state GO bonds, because of the need for annual legislative appropriation of payments.
