Moody’s downgrades Illinois’ credit rating to almost junk status

SPRINGFIELD, Ill. — Moody’s Investors Service cut Illinois’ credit rating by one notch to Baa2 with a negative outlook on Wednesday, citing a political stalemate that has prevented the state from addressing its budget imbalance and big unfunded pension liability.

The downgrade to just two steps above the “junk” level affects about $26 billion of Illinois’ general obligation debt, as well as $2.75 billion of sales tax revenue bonds.

An impasse between its Republican governor and Democrats who control the legislature has left Illinois as the only U.S. state without a complete budget 11 months into fiscal 2016. Court-ordered spending and ongoing and stopgap appropriations have allowed Illinois to keep operating.

Moody’s said the long-running partisan standoff is impeding Illinois’ powers to increase revenue or constrain spending.

Moody’s said in a statement that the state’s structural budget gap equals at least 15 percent of general fund expenditures, if the state’s underfunding of pension contributions is included.

It added that without a budget plan to offset a revenue loss from 2015’s rollback of income tax rates, Illinois’ chronic backlog of unpaid bills could reach prior peak levels of about $10 billion in the coming months.

Even before this latest downgrade, Illinois had the lowest credit ratings among the 50 states and has had to pay a big interest rate penalty to sell its bonds.

A $550 million Illinois GO bond issue is slated for competitive sale June 16.