Drops in state’s credit rating could be ‘wake-up call’ for pols

Illinois’ “political gridlock” prompted two major credit rating agencies to downgrade the state’s credit rating — two levels above “junk” status — but that one-two punch could motivate politicians to end the messy budget impasse.

Moody’s Investors Service on Thursday lowered Illinois’ rating on $26 billion in debt by one level to Baa2. That downgrade affects $2.75 billion in revenue bonds.

“The rating downgrade reflects continuing budget imbalance due to political gridlock that for more than year has kept Illinois from addressing revenue lost due to income tax cuts that took effect in January 2015,” the agency wrote of the downgrade.

Several hours later S&P Global followed suit, downgrading the state’s general obligation bonds to BBB+ from A-.

“The downgrade reflects the state’s weakened financial management and fiscal position and our view that Illinois’ continued delay in developing a long-term plan to address its liabilities is placing increased pressure on the rating,” S&P Global Ratings credit analyst John Sugden said in a statement. “In our view, the duration of this mismanagement has undermined Illinois’ credit profile and impeded its ability to address its long-term liabilities.”

Illinois Comptroller Leslie Munger detailed the devastating effects of the budget impasse should it continue through July 1: Set to expire are appropriations for nearly $13.7 billion for K-12 schools and teacher pensions; $5.379 billion for federal funds including the Low Income Energy Assistance Program, public health services, cancer screenings, HIV prevention and home-delivered meals for seniors; $3.1 billion in funding for local governments, 911 call centers, domestic violence shelters and the Lottery; and $600 million for colleges, universities and MAP grants.

Civic Federation President Laurence Msall said Thursday’s downgrades by Moody’s and S&P will have an “enormous impact on the state financially” that should light a fire under Rauner and Democratic legislative leaders.

“This downgrade is going to cause tens of millions of dollars in additional borrowing costs that could have been used to help our most vulnerable citizens and, instead, will just evaporate into higher debt service costs,” Msall said.

“There’s no denying the financial and reputational wreckage caused by the State of Illinois not having a budget. It is well beyond the time for our elected officials to resolve their differences and allow the state to move forward. If the Legislature and the governor needed yet another wake-up call as to how dangerous the situation has gotten in Illinois, they now have it.”

Last year, Moody’s infuriated Mayor Rahm Emanuel by dropping Chicago’s bond rating two notches to a junk status shared only by Detroit among major cities.

The double-drop was Moody’s response to an Illinois Supreme Court decision that overturned state pension reforms, placing Emanuel’s plan to save two of four city employee pension funds in similar jeopardy.

City Hall could not understand why Moody’s had targeted Chicago’s bond rating for a devastating double-drop while leaving the state’s bond rating unchanged.

The junk bond rating has forced Chicago taxpayers to pay hundreds of millions of dollars in penalties and higher interest rates.

The Supreme Court has since overturned the city’s plan to save the Municipal Employees and Laborers pension funds.

Now, the state will at least begin to feel similar pain. It just might turn up the heat on Rauner and Democratic leaders to reach a deal. A key sticking point has been the governor’s pro-business, anti-union “Turnaround Agenda” — which the governor insists is needed to save the state’s economy, but Democrats see as an attack on the middle class.

Illinois State Treasurer Michael Frerichs called the Moody’s downgrade “disappointing because it is avoidable.”

“Illinois remains a good investment, but the focus on non-budgetary items is driving up the cost of government,” Frerichs said in a statement. “Higher interest rates when we borrow money mean fewer dollars for teachers, child care workers, and others who serve our most vulnerable.”

Frerichs’ office warned repeated downgrades weigh heavily on how individuals and investors perceive Illinois’ economic and political climates.

Rauner’s office on Thursday said the governor had already warned the “super majority” about a pending downgrade before legislators left Springfield without a budget.

“This report underscores the need for real structural changes to repair the years of unbalanced budgets and deficit spending by the majority party on Illinois’ finances,” Rauner spokeswoman Catherine Kelly said in a statement. “Every rank-and-file Democrat who blindly followed the Speaker down this path is directly responsible for the downgrade.”

It’s the continuation of a message Rauner has sent to legislators since he began a statewide tour on June 1, urging them to stand up against Democratic leaders — while pitting the state against Chicago — to get a budget and education funding bill passed.

Madigan shot back that the downgrade is Rauner’s fault.

“It’s an outrage that we have gone nearly a year without a state budget. This downgrade is directly attributable to Governor Rauner’s reckless decision to hold the state hostage for more than a year and to create the crisis he desired,” Madigan said in the statement.

“The governor’s own proposed budgets are billions of dollars out of balance, and, for almost a month, a bipartisan plan to provide emergency funding for human services providers and our most vulnerable has languished on Governor Rauner’s desk,” Madigan said of a bill that is sitting on Rauner’s desk and would provide a stopgap measure to fund social services. “He refuses to sign that bill because he continues seeking a state of crisis in Illinois.”

Rauner on Wednesday defended his decision not to sign that bill, saying it doesn’t have “essential services in it.”

“That bill is designed to still create a government crisis,” Rauner said.

The measure, approved by both the Illinois House and Senate would have authorized spending about $450 million from a human services fund, and another $250 million from special funds to be spent on items such as foreclosure prevention, and affordable housing.

Rauner aides called language in the bill a “drafting error” that should force all parties to redouble their efforts toward reaching a bipartisan agreement.

Madigan on Thursday also reiterated his commitment to fight against reforms that he says would be at the expense of the middle class.

“The governor needs to work with legislators to pass a budget that ensures we continue to fund education, health care for the frail elderly and persons with disabilities, and other basic services that Illinois families rely on, rather than refusing to allow government to function in order to continue his manufactured crisis,” Madigan said.