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S&P, Moody’s downgrade Illinois to one step above junk

S&P Global Ratings and Moody's Investors Service downgraded Illinois' credit rating to one step above junk Thursday, citing continued concerns over the state's budget impasse.

S&P downgraded Illinois' general obligation bond rating one notch to BBB-. A history of S&P ratings dating as far back as 1956 show BBB- to be the lowest state rating on record.

Meanwhile, Moody's downgraded Illinois' general obligation bond rating to Baa3.

“The rating actions largely reflect the severe deterioration of Illinois' fiscal condition, a byproduct of its stalemated budget negotiations, now approaching the start of a third fiscal year,” said Gabriel Petek, an S&P credit analyst, in a Thursday news release. “We placed the ratings on (the credit watchlist) with negative implications because, in our view, the unrelenting political brinkmanship now poses a threat to the timely payment of the state's core priority payments.”

Illinois has been operating without a full budget since July 1, 2015. S&P said in its downgrade report that Illinois' credit rating will likely be lowered further if lawmakers fail to pass a budget that reduces the state's structural deficit. Lawmakers still have until June 30 to pass a fiscal year 2018 budget, but the ability to pass the budget with a simple majority vote expired May 31. A three-fifths majority vote is now required.

Beyond Illinois' “immediate budgetary implications, the state's very large unfunded pension and retiree health benefit liabilities also weigh on its credit outlook over the longer term,” the ratings agency added in its report.

On a GASB 68 accounting basis, Illinois' five state pension funds face $141.1 billion in unfunded liabilities combined and a collective funding ratio of 35.6%, according to S&P.

In fiscal year 2017, the general fund portion of the state's pension contribution rose to $6.93 billion (representing 22% of general fund budgeted revenues) up from $6.631 billion in fiscal year 2016. In fiscal year 2018, the state estimates the general fund portion of the state's pension contribution will rise to $7.89 billion, S&P added in its report.