Moody’s warns no state budget may mean further credit downgrades

Moody’s Investors Service on Wednesday issued an ominous report about Illinois’ finances, warning that the lack of a full-year budget will more than double the state’s deficit and could lead to further credit downgrades.

Moody’s is also warning that if the state begins to borrow from debt service funds to run the state, it would “signal a deterioration in Illinois’ credit position.” The state is still reeling from its delayed November pension contribution because of insufficient cash, and its missed debt service transfer last summer to the Metropolitan Pier and Exposition Authority.

According to the report, the partial budget will likely widen the state’s operating fund deficit with a backlog of bills likely to reach $14 billion or more — a new high — this year “absent actions by the government to align revenue and spending.”

The report says current spending authorizations, appropriations, court orders and consent decrees in the fiscal year, which began July 1, will drive up expenditures by an estimated 12 percent compared with the revenue coming in.

The report warns that the state might “resort to actions that cast doubt on an otherwise strong legal framework prioritizing debt payment, such as borrowing from funds set aside for debt service.”

Moody’s also warns that a reliance on payment deferrals to offset the budget imbalance will be hard to end, calling the payment backlog “the by-product of a weak governance structure that includes permissive laws and legal interpretations.”

The strong warning comes as Gov. Bruce Rauner, the legislative leaders and the General Assembly are set to return to session in late November for a veto session. As part of the stopgap budget agreement reached in July, legislators will seek to reform pensions and come up with a full-year budget by the end of the year.

On Tuesday, Moody’s called the decision last week to lower the rate of return on teacher retirement investments “positive” for Illinois but warned that contributions to the Teachers Retirement System should be $1.5 million more next year to ensure the unfunded liability doesn’t go up. The lower rate means Illinois will have to come up with an additional $400 million to $500 million in the 2018 budget to meet required payments.

Moody’s in June downgraded the state a notch, to Baa2, because of the state’s budget imbalance and its unfunded pension liability. The downgrade put the state’s credit rating two steps above the “junk” level.

Rauner’s administration on Wednesday said they oppose borrowing from debt service funds.

“For more than a decade, the General Assembly has failed to enact a balanced budget. Passing a balanced budget alongside meaningful reforms will stop the supermajority’s cycle of spending more than available revenue,” spokeswoman Catherine Kelly said in a statement. “The administration opposes any plan to borrow from debt service funds.”

And at a Naperville event on Wednesday, Rauner said he’s “hoping” legislators will come together to enact a balanced budget by January.

“It’s [the stopgap budget] not balanced. Unpaid bill backlog is growing. It’s not growing as fast as it would if we didn’t have the stopgap, but it’s still growing. So this is not a long-term solution. This just gets us through the election,” Rauner said.

“What I’m hoping is that after the election — in the lame duck session between Nov. 8 and the middle of January when the new General Assembly comes in — that we can get a grand compromise with a truly balanced budget with expense reductions and some new revenues along with significant reforms to grow our economy, protect our property taxpayers from the highest property taxes in America, and properly fund our schools, along with get pension reform.”