Moody’s Downgrades Illinois’ Bond Ratings Due to Unpaid Bills, Unfunded Pension Liabilities

Moody’s Investors Service has downgraded the state of Illinois’ general obligation bonds to Baa3 from Baa2 in the midst of a drawn-out political impasse that’s halted progress on the state’s growing pension deficit and ballooning unpaid bills.

As a result of the downgrade, Moody’s lowered the ratings of several state debt types—outstanding debt for all affected securities totals about $31.5 billion—linked to general obligation bonds, including Build Illinois Bonds backed by sales tax revenues, the Metropolitan Pier & Exposition Authority’s McCormick Place project bonds and the state’s Civic Center program bonds. The credit rating agency’s outlook for the state and these associated credits remains negative.

Currently, about 40% or $15 billion of Illinois’ operating budget consists of unpaid bills, Moody’s said. After a year of failed negotiations to address the issue, Moody’s said the state deserves the downgrade, “regardless of whether a fiscal compromise is reached in an extended session,” analysts said.

According to a Moody’s analysis, Illinois’s unfunded pension liability grew 25% to $251 billion in the year that ended June 30, 2016. The state’s credit strengths are incorporated into the new rating and include its sovereign powers over revenue and spending, a strong economic base with long-term potential to provide for its liabilities and statutory protections from bondholders. However, “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,” Moody’s analysts said.

– Nicholas Stern, senior editor

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