Illinois's $25 billion of bonds get negative Moody's outlook

Friday, September 24, 2010

Illinois, facing the worst financial crisis in its history, received a negative outlook on $25 billion of general obligation bonds from Moody's Investors Service after failing to address a deficit that almost tripled in one year.

A negative outlook may indicate another cut to the state's rating, which was lowered to A1, fifth-highest, on June 4, Moody's said today in a release. Lower ratings can increase the cost of borrowing as investors demand higher returns to compensate for increased risk.

"We see risks that could trigger a downgrade in the next 18 months to two years," Ted Hampton, an analyst with Moody's, said in an interview from New York. "In June these risks were less apparent."

The company's release cited a negative fund balance for fiscal 2009 and questions about whether the state will meet pension funding obligations.

Governor Pat Quinn's office said the report shows that lawmakers must cooperate with him to create jobs, cut spending, raise revenue and borrow responsibly.

The ratings company's decision "underscores why the General Assembly must work with Gov. Pat Quinn to address the state's unprecedented financial situation," the office said in a prepared statement.

The yield of taxable Build America Bonds issued by Illinois in June has risen to almost 2.5 percentage points above benchmark 30-year Treasury bonds from just over 2 percentage points on June 24.

Illinois's budget deficit in 2009 widened to $7.7 billion, almost tripling, Moody's said. The debt burden may increase because of continued borrowing for the state's capital program and contributions to its pension plans, the company said.

State pensions in Illinois, Kansas and New Jersey all have assets insufficient to cover benefits, according to data compiled by Bloomberg.

Illinois ended fiscal 2010 on June 30 "in the worst fiscal position in its history," Comptroller Daniel Hynes said in a report.

The state's backlog of unpaid bills rose to $4.7 billion from $2.8 billion a year earlier and its general fund balance fell to negative $4.7 billion, the lowest level in the state's history.