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Moody's, S&P downgrade state again on budget, pension concerns

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Moody's Investors Service Inc. has downgraded Illinois' credit to Baa2 from Baa1, while Standard & Poor's Corp. lowered its rating to BBB+ from A-.

Both rating agencies have assigned negative outlooks.

Illinois has been operating without a budget since the fiscal year began July 1, 2015, and also failed to pass a budget for the fiscal year starting July 1 before its last legislative session ended.

“The state's structural budget gap equals at least 15% of general fund expenditures, if the state's underfunding of pension contributions is included,” said Moody's in a ratings report issued Wednesday. “If this gap continues into a significant portion of the coming fiscal year, it will put pressure on operating fund liquidity and add to an already sizable bill backlog. We project that backlog will surpass prior peak levels (about $10 billion) in coming months, in the absence of a consensus on a budget that offsets the loss of revenue from the 2015 (income) tax cuts.”

S&P noted in its Thursday ratings report that the state still has until June 30 to pass a fiscal year 2017 budget, but that the odds decreased after May 31, when the ability to pass the budget with a simple majority vote expired. A three-fifths majority vote is now required.

As of June 30, Illinois' five state retirement systems faced $111 billion total in unfunded liabilities and a funding ratio of 41.9%, the worst in the nation.

“When the General Assembly adjourned without passing a balanced budget, the administration warned the supermajority in the Legislature there would be consequences,” said Catherine Kelly, spokeswoman for Illinois Gov. Bruce Rauner, in a statement on the Moody's downgrade. “This report underscores the need for real structural changes to repair the years of unbalanced budgets and deficit spending by the majority party on Illinois' finances. Every rank-and-file Democrat who blindly followed (House Speaker Michael Madigan) down this path is directly responsible for the downgrade.”

A spokesman for Mr. Madigan could not be reached for comment by press time.

Meaghan Kilroy writes for Pensions & Investments, a sister publication of Business Insurance.

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