The Bond Buyer

Fitch Drops Illinois, Citing Lack Of Progress on Budget Problems

Monday, June 14, 2010

CHICAGO - Illinois' general obligation rating slid further down the scale on Friday when Fitch Ratings downgraded the state to A from A-plus, blaming leaders' failure to tackle the state's fiscal and liquidity crisis in the next budget.
Fitch's action affects $25.7 billion of GOs. The agency also downgraded to A-minus from A bonds issued with appropriation support from the state. Fitch removed the rating from negative watch and assigned a negative outlook at the lower level. Only California is rated lower by Fitch at A-minus. All other states rated by the agency are at AA-minus or higher.
"The rating downgrade reflects the continuing unwillingness of the state of Illinois to take action to address its significant budgetary problems. The recently enacted fiscal 2011 budget does not begin to address the current operating gap, relying almost entirely on various forms of deficit financing to close the gap," said analyst Karen Krop. "The state is facing a growing budget deficit, very high accounts payables, and a significant structural gap for which solutions have been difficult to identify and implement."
The action comes ahead of the state's competitive sale of $300 million of taxable GO Build America Bonds on Thursday and $900 million of GO BABs later in the month. The state also plans this week a $500 million restructuring of Build Illinois bonds but those bonds carry a sales tax pledge. Fitch rated those bonds AA-plus.
Moody's Investors Service one week earlier downgraded Illinois to A1 from Aa3, citing the state's reliance on one-shots, or non-recurring revenues, to deal with a $13 billion deficit. Standard & Poor's rates the state's GOs A-plus and has the rating on negative watch.
The 2011 budget, which still has a $3.7 billion shortfall tied to the state's next pension payment, leaves $6.4 billion of bills, equal to 23% of general fund resources, unpaid at the close of fiscal 2010 on June 30. The budget's one-time actions include a $1.4 billion tobacco settlement financing and the transfer of revenues from non-general fund accounts.
The state's debt burden continues to rise as it moves to fund the $31 billion capital plan approved by lawmakers, and the House approved a $3.7 billion deal to cover the state's fiscal 2011 pension payment but the Senate rejected it. Gov. Pat Quinn is expected to soon call lawmakers back to work to resurrect the plan.
With the statewide election looming in November, Quinn, a Democrat, failed to win an income tax hike this spring and he and the Democratic leaders of the General Assembly have resisted deep spending cuts. Quinn faces Republican Sen. Bill Brady of Bloomington in the governor's race.