SPRINGFIELD – Gov. J.B. Pritzker offered an ambitious plan to lawmakers this week to pay down the state’s backlog of unpaid bills, slow down payments into the state’s troubled pension systems while at the same time asking them to put together an ambitious, multi-billion-dollar plan to repair the state’s crumbling roads, bridges, airports and college buildings.
But to accomplish that, the state would need to borrow a lot of money. And there are significant questions about how the financial markets would respond to that.
All three major credit rating agencies – Moody’s, S&P and Fitch Ratings – rate state of Illinois bonds a notch above “junk” status. And there are elements in Pritzker’s plan that some analysts say could cause those agencies to consider making that downgrade, a change that would have dire financial consequences for the state.
Rating agencies don’t use the phrase “junk bonds.” They classify them as “investment grade” and “non-investment grade.” But Brian Battle, a director at Performance Trust Capital Partners in Chicago, said if Illinois does fall into that lower category, it wouldn’t take long for the average Illinoisan to feel the impact.
“If Illinois gets downgraded below investment grade, the cost of government, the cost of services in the state of Illinois goes up,” he said. “The cost of living in the state of Illinois goes up.”
Rating agencies and financial analysts have warned about Illinois’ credit rating in the past, and the state has still maintained investment-grade status. Much of the current concern about Pritzker’s budget plan stems from statements Moody’s made in August 2018, the last time Illinois issued bonds.
Moody’s rated those bonds Baa3, the lowest investment-grade rating. In a report explaining that rating, Moody’s outlined factors that could cause the agency to raise or lower the rating in the future.
Illinois could improve its rating, the agency said, by adopting “a comprehensive plan to address pension liabilities,” and paying down its backlog of bills in a way that, “does not rely on long-term borrowing.”
And on the negative side, Moody’s said one thing that could lead to a downgrade would be reducing payments into the state’s pension systems to free up money for other government purposes.
The Pritzker administration has offered what it calls a “comprehensive” plan to deal with the state’s unfunded pension obligations, but it includes borrowing $2 billion to infuse cash into the system immediately, then stretching out the timeline for paying down the unfunded liabilities by an additional seven years, to 2052; that effectively reduces the amount of general state revenue that would need to go into the funds.
Pritzker’s plan for paying down the backlog of bills also calls for issuing $1.5 billion in long-term debt.
Ted Dobrowski, who writes for the website Wirepoints.org, which focuses on Illinois politics, finances and economy, said those are all actions that rating agencies could view unfavorably.
The Pritzker administration, though, strongly disagrees with that assessment.
“The governor proposed a realistic plan to serve as a bridge to the future, with the ultimate goal of a fair tax system that will transform state finances, including pensions,” press secretary Jordan Abudayyeh said in a statement. “No element of our comprehensive pension approach can be viewed in isolation, and we expect the markets will look favorably upon infusing cash and assets into the system and dedicating more revenue from the fair income tax over and above scheduled payments.”
A Moody’s spokesman said the agency does not comment on budget proposals. But it likely will review the state’s fiscal condition after a final budget and pension plan is passed.