State’s messy finances lead to downgrade by Fitch Ratings

From press release

Major credit rating agency Fitch Ratings recently downgraded the state’s general obligation rating from an A to an A minus, warning that the state’s credit rating could drop further if nothing is done to address Illinois’ massive deficit and multi-billion dollar bill backlog.

Despite recent action by state lawmakers to ward off the possible downgrade—the passage of a pension reform measure intended to show that Illinois is committed to getting its fiscal house in order—the credit rating agencies didn’t bite. March 29, Fitch downgraded the state while maintaining a continued Rating Watch Negative, while on March 26 Standard & Poor placed Illinois on a negative credit watch. Moody’s Investors Service has also affirmed its negative outlook.

While commending the pension reforms, Fitch Ratings focused more on the overall fiscal mismanagement of the state under Gov. Pat Quinn (D) and legislative Democrats. In issuing the downgrade, the rating agency said, “The rating downgrade reflects the magnitude and persistent nature of the state’s fiscal problems and the likelihood that the budget to be enacted for fiscal year (FY) 2011 will not sufficiently address either the annual operating deficit or accumulated liabilities.”

Fitch highlighted Quinn’s plan to borrow nearly $5 billion more than the state will take in, and defer payments to state vendors, to avoid difficult budget decisions.

“The state continues to manage its budgetary deficit by deferring payments to vendors and others,” the agency added, while also pointing out that “the state expects to use additional deficit borrowing to close its projected budget gap.”

In December 2009, the credit rating agency said a downgrade was probable if the state did not take significant strides to address its substantial debt. Fitch noted it seems unlikely Illinois would take those steps: “…it appears now that budget solutions will continue to be pushed out to the future, budgetary balance will continue to rely on sizeable borrowing, and those reliant on state payments will continue to have long waits to be paid.”

Though the agency noted that the state’s recent attempt to lower its pension liabilities is a “credit positive,” the short-term benefit is negligible and thus did not substantially benefit Illinois when it came to maintaining the state’s previous A bond rating.

By placing the state on Rating Watch Negative, Fitch Ratings acknowledges that the state is likely to face further downgrades of its credit rating. Only California has a lower credit rating from all three agencies than Illinois.