
This action MIGHT hold the credit rating agencies at bay – for now – but the risk of being downgraded to a junk rating can still happen this year, and the consequences could severely harm the state, the fifth largest in the nation. Illinois currently has a $15 billion backlog of unpaid bills, roughly 40% of the state’s operating budget. A junk rating could hit investors too, although the state’s pledge to keep up with bond payments has preserved bond values so far. The fiscal-year deadline caught up with other states as well. Maine and New Jersey announced Saturday that their respective government operations would have to shut down after lawmakers failed to reach budget deals before Friday’s midnight deadline. Both states came to a budget agreement early this week. Rauner, who likely faces a tough re-election battle in 2018, had sought a temporary tax hike and a property tax freeze.“Under Speaker [Michael] Madigan’s direction, legislators chose to double down on higher taxes while protecting their special interests and refusing to reform the status quo. It’s a repeat of the failed policies that created this financial crisis and caused jobs and taxpayers to flee” the governor, who was elected on his pledge to reform pensions and break union power, said earlier in the process. For his part, Madigan, the Chicago Democrat who is House Speaker, has been insistent on linking non-budget demands to the budget discussion, including an education funding overall. Illinois is one of only a handful of other states that rely on property taxes to fund schools. Past-due bills are a big strike against Illinois’s credit standing, but Standard & Poor’s, which rates the state BBB-minus or one step away from the “junk” rating that would be the first for any state, has warned about a chronic structural deficit. S&P has Illinois on warning for a downgrade to BB-plus. The state is rated Baa2 by Moody’s Investors Service and BBB by Fitch Ratings, both with negative outlooks. Standard & Poor’s responded to the House passage by calling that action a “meaningful step.” ”Even with a budget, however, it’s likely that Illinois’ finances would remain strained and vulnerable to unanticipated economic stress. In addition to having accumulated record amounts of payables, the state’s university system has been deprived of state funding since January,” S&P analysts said. “If a budget is enacted, the degree to which it closes the state’s structural deficit, provides a pathway for addressing the backlog of unpaid bills and its impact on cash flows will be important factors in our review of its effect on Illinois’ credit quality.” Spillover effect? The state’s uninsured general obligation debt traded this week as high as 95 cents on the dollar, well above junk equivalents. Much of Illinois’s $25 billion in outstanding general obligation debt is held by individual investors. Money management giant Vanguard Group has $1.2 billion of the state’s bonds spread across seven mutual funds. It is the biggest holder among all mutual fund firms that own a total of $4.5 billion in Illinois bonds, according to research firm Morningstar. Most mutual funds have rules limiting their investment in junk-rated debt, although rules typically do not force them to sell debt that has fallen into junk. At Vanguard, mutual funds are allowed to hold a “modest allocation” of junk bonds, a spokesman told The Wall Street Journal. Analysts predict investors could demand an additional half-percent to a percent in interest as compensation for the perceived risk that comes with a junk rating. That will tack on an additional $5 million to $10 million for every $1 billion the state borrows. Illinois already pays a premium. When it last sold tax-exempt debt in November 2016, the state paid yields of 4.4% for 20-year bonds. In contrast, 20-year bonds issued by the state of Wisconsin around the same time yielded 2.8%, The Wall Street Journal reported. The situation has prompted some comparisons with Puerto Rico, which earlier this year announced a historic restructuring of some of its $70 billion in debt through courts after negotiations with bondholders fizzled. New Jersey and Connecticut, among the lowest-rated states after Illinois, face their own longer-term budget problems and mounting liabilities. But New Jersey and Connecticut still have a long way to go to match Illinois’s ratings risk; they are rated several notches higher by S&P and Moody’s Investors Service. Other than Illinois, New Jersey, and Connecticut, the lowest rating of any other state is AA-. There are nine states rated higher than the U.S. itself even, with full AAA ratings.I just vetoed Speaker Madigan’s 32% permanent income tax increase. pic.twitter.com/Hn5SPm0w2h
— Bruce Rauner (@GovRauner) July 4, 2017
New Jersey Gov. Chris Christie was in the weekend spotlight after cameras captured the Republican leader enjoying the sand and surf at a waterfront Jersey Shore park that been closed to the public because of the state’s budget impasse.
Chris Christie & guests enjoying NJ beach — after he ordered state beaches closed to the public over a budget fight https://t.co/aD3pkhT4vF pic.twitter.com/JkAh31BG08
— Bradd Jaffy (@BraddJaffy) July 2, 2017
Jake Leonard, a broadcast media and journalism veteran, is the editor-in-chief of Heartland Newsfeed. Leonard is also GM and program director of Heartland Newsfeed Radio Network, wrestling editor and contributing writer for Ambush Sports, a contributing writer for My Sports Vote and Midwest Sports Network, and a former contributor to Bleacher Report and Overtime Heroics. He resides at home in Nokomis, Ill. with his dog Buster.