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S&P warns proposed Illinois budget could worsen its credit rating

S&P Global Ratings warned that Illinois Gov. J.B. Pritzker's 2020 budget proposal could "weaken the state's credit trajectory," said a news release.

Illinois already has a BBB- from the credit rating agency, and further weakening of that trajectory would put it squarely in junk bond territory, said the Feb. 22 news release, which S&P specified was not a ratings action.

The agency warned it finds the budget's balance "dubious," stating that the estimates for new revenues might prove to be optimistic. Those estimates include an assumption of the legalization of sports betting and marijuana sales, which the agency said "could take the state longer than it estimates to implement."

Another key element of the budget proposal was the Feb. 14 plan rolled out by Deputy Gov. Dan Hynes to close the $134 billion unfunded liability gap for Illinois' five pension funds. That plan includes extending the pension funds' amortization schedule by seven years to make the plans 90% funded by 2052 instead of 2045 to save the state $800 million annually.

S&P warned that "deferring pension contributions has been a key contributor to Illinois' deteriorating credit position. Even if the state were to continue its current 2045 amortization schedule, its pension plans exhibit negative cash flows given that annual benefit payments exceed incoming contributions. As a result, these plans are required to sell assets each year to maintain benefit payments, compounding system liquidity constraints and raising the specter of suboptimal market timing, both of which can create headwinds for healthy investment returns."

Regarding Mr. Pritzker's plan to also issue $2 billion in pension obligation bonds, S&P said: "The POB represents just 1.5% of the state's nearly $134 billion pension liability and would do little to boost the overall funded ratio. On the other hand, it would represent a modest 6% increase in the state's debt burden. If a market downturn were to occur following the POB issuance, it could possibly negate any budgetary savings and increase the state's overall fixed costs."

Mr. Pritzker's spokeswoman Jordan Abudayyeh could not be immediately reached for comment.