(CHICAGO) Another day, another downgrade for Illinois amid its budgetary and pension problems.
S&P Global Ratings on Friday dropped the state’s credit rating one notch — from BBB+ to BBB, the Chicago Sun-Times is reporting.
The downgrade on the state’s general obligation bonds came with a hefty warning that things could get worse without significant pension reform and a budget fix: “We could lower our rating should the state continue to demonstrate a lack of ability or willingness to adopt a long-term structural budget solution that also incorporates a credible approach to its long-term liabilities,” S&P wrote in its downgrade report. “It also reflects our view that Illinois’ ability to maintain adequate debt-paying capacity is becoming increasingly challenge the longer the political gridlock in Springfield plays out.”
Factors for the downgrade included a long history of “structural imbalance” that limits the state’s ability to curb its spending without a budget; “top leadership’s highly polarized views on how to address Illinois’ fiscal imbalance”; a large operating deficit of about $6 billion which could rise up to $11 billion by 2017 without a budget compromise; $111 billion in unfunded pension liability; and a high debt burden, the rating agency said.
“The downgrade reflects our view of continued weak financial management and increased long-term and short-term pressures tied to declining pension funded levels,” said S&P credit analyst John Sugden. “In our view, the extremely weak market returns for Illinois pension systems will contribute to substantial increases in the state’s statutory contribution, in addition to the contribution increases resulting from several changes to assumed rates of return.”
In a statement, Rauner’s administration said the downgrade reiterates just how important pension reform is.
“This report underscores Illinois’ need for tangible pension reform after career politicians deliberately underfunded the system for decades. It’s time for the supermajority in the legislature to recognize the current pension system is fatally flawed and requires immediate action,” Rauner spokeswoman Catherine Kelly said in a statement. “Governor Rauner continues to fight for pension reform and other fundamental, structural reforms that will free up resources to help balance the budget.”
The downgrade comes as the state prepares to sell about $1.7 billion of bonds in October despite having to pay a penalty.