Illinois May Look More Like Junk as Pressure Rises, S&P Says

(Bloomberg) -- Without federal aid, Illinois credit pressures are mounting, and the state may have to borrow more even as officials seek to cut spending and balance the budget, according to S&P Global Ratings.

The coronavirus has exacerbated the worst-rated state’s challenges, including already large budget gaps and weak demographics, as the economic toll of the pandemic hurt revenue collections and increased costs.

“With the need for additional borrowing, an elevated bill backlog, and lingering substantial structural imbalance, Illinois could exhibit further characteristics of a non-investment-grade issuer,” S&P analysts Carol Spain and Geoffrey Buswick wrote in a report published Monday. S&P rates Illinois BBB-, one level above junk, with a negative outlook.

“The magnitude of the current budget gap and reliance on one-time measures make us question Illinois’ ability to achieve structural balance in a reasonable time,” the analysts wrote. “Even if Illinois receives federal aid in fiscal 2021, we expect that it will face challenging budget gaps beyond the current fiscal year.”

Spain and Buswick said it is likely that Illinois will have to issue bonds or again borrow through the Federal Reserve’s Municipal Liquidity Facility to meet cash requirements. Illinois is the only state that has already borrowed from the central bank through the program.

But S&P warned that the state will have difficulty repaying a large borrowing within the three-year Fed facility timeline, and taking out a loan to repay a short-term borrowing would increase the state’s fixed costs. The state has strong market access supported by the MLF, according to the report.

S&P laid out the following challenges facing Illinois:

• Speculative revenues account for nearly 15% of Illinois’ fiscal 2021 budget as the state left a $5 billion placeholder for additional federal assistance and expects to get $1.3 billion in projected revenue from a graduated income tax that residents will vote on in November
• Governor J.B. Pritzker is considering as much as 15% across the board budget cuts
  • State’s deputy governor asked agency heads to lay out a 5% reserve of general fund appropriations, followed by a 10% consideration in FY2022
    • Such cuts would likely have “negative downstream effects” on Illinois’s economy and revenue: S&P
• Illinois’ unpaid bill backlog reached $7.65 billion as of Sept. 21
  • That’s in addition to $2.25 billion in short-term borrowing that the state has to repay
• Revenue recovery to pre-pandemic levels is unlikely in the near term
• Lack of additional federal stimulus boosts the likelihood of a worse economic outcome

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