Illinois Now Has The Lowest S&P Bond Rating Of Any State, Ever

By Stephen Gossett in News on Jun 1, 2017 5:50PM

Getty Images; Photo: Mark Wilson

Add another victim to the embarrassing budget impasse's pileup. A leading credit rating agency just downgraded Illinois' bond rating to just one step above junk. It's the lowest rating any state has ever received by Standard & Poor's—and it very well could fall lower still.

The agency left little doubt as to the cause of the ding, which arrived one day after lawmakers in Springfield again missed a deadline to pass a budget, with the stalemate now 700 days strong and the state's unpaid bills hitting a staggering $14 billion.

"The rating actions largely reflect the severe deterioration of Illinois’ fiscal condition, a byproduct of its stalemated budget negotiations," S&P analyst Gabriel Petek said in a statement. “The unrelenting political brinkmanship now poses a threat to the timely payment of the state’s core priority payments."

With the disastrous effects of the absence of a budget so palpable on state universities, social services and even K-12 education, a credit grade might seem esoteric or abstract, but it of course has real-world consequences, too. The downgrade increases borrowing costs, which have already spiked. A dip into junk push many mutual funds away from the state's securities, Bloomberg notes.

It appears that the threat of hitting that even-lower-than-the-new-low low is very real, too. After failing to meet an agreement on Wednesday, lawmakers gave themselves one more month to come up with a budget. If Springfield again fails by July 1, S&P said they will probably push the rating down again, to junk.

"In our view, the ongoing budget impasse has increased the nonpayment risk associated with Illinois' obligations that require a budget appropriation before they can be funded. We now view these payment obligations as having speculative-grade characteristics," S&P said.

Illinois has negative-outlook ratings from the other major agencies, Moody's and Fitch, also. No state has ever been downgraded to junk by any those or S&P, according to Reuters.

Update:
Moody's announced on Thursday that it also downgraded Illinois' ratings. The agency lowered the state's general obligation bones to Baa3, down from Baa2. "The state's negative outlook is consistent with its potential for additional credit weakening because of a continuing political impasse that has left Illinois increasingly vulnerable to adverse revenue trends and severely underfunded retiree benefit plans," Moody's wrote in a release.