Moody’s keeps Illinois on watch for downgrade despite budget, tax hike

Moody’s Investors on Friday placed Illinois’ near-junk bond rating under review for a possible downgrade, citing “credit challenges” that linger, even after the Illinois General Assembly overrode Gov. Bruce Rauner’s veto of a budget that was balanced, in part, by an increase in the state income tax.

Four days after Standard & Poor’s boosted its outlook for Illinois, Moody’s did just the opposite.

Moody’s noted that the income-tax hike retroactive to July 1 would generate $5 billion in fiscal year 2018. That should ease a cash crunch that has created a $15 billion mountain of unpaid bills.

But Moody’s said the state is not out of the woods. Far from it.

“The state’s ability to generate sustained surpluses to prevent renewed growth in its backlog of bills is uncertain,” the Moody’s report states.

Illinois’ credit ratings stand at one notch above “junk” status with all major ratings agencies. The ratings are important because they help determine the interest rates at which the state borrows money; the worse the rating, the more taxpayers pay.

Political observers had been concerned Moody’s might lower Illinois’ credit rating regardless of whether a budget passed. Friday’s statement by Moody’s appears to leave open that possibility — but keeps the rating the same for now.

Moody’s noted that actuarial changes and an optional benefit plan for new state hires could reduce fiscal 2018 pension spending by $1.5 billion. But those changes are “primarily designed to provide near-term fiscal relief” and do little to solve the long-term pension crisis.

“Unfunded pension liabilities remain a fundamental credit challenge and they are still rising,” Moody’s said. “Illinois has failed to enact pension reform measures that improve the long-term sustainability of its pension burden without running afoul of its constitutional protection of pension benefits.”

The report states that the “greatest uncertainty” surrounds school districts, including Chicago Public Schools. That’s because education spending is tied to a revamped state school aid formula that Gov. Bruce Rauner has threatened to veto on grounds that it amounts to a CPS bailout of $300 million now and potentially more in subsequent years.

Democratic legislative leaders have yet to send the bill to the governor’s desk in hopes that the delay will increase pressure on him to sign it.

That puts the nearly broke Chicago Public Schools, which borrowed at exorbitant costs to avoid an early closing of schools, on perilous ground. “Given the uncertainty in state funding and the district’s borrowing limits, CPS has few near-term options,” Moody’s wrote.

Mayor Rahm Emanuel on Monday sloughed off Moody’s threat to drop Chicago’s bond rating even further into junk territory because of his promise to do whatever it takes to ensure an on-time opening of Chicago Public Schools. Emanuel also continued to play poker with his plan to tax downtown businesses and high-net-worth individuals to put CPS on solid financial footing.