To Avoid Junk Bond Status, Illinois Treasurer Gives Gov. Rauner Ultimatum

Steps include speaking with rating agencies in New York, implementing $6 billion in bonding authority.

To prevent Illinois from becoming the first state in US history issued junk bond status, State Treasurer and state CIO Michael Frerichs Monday gave Gov. Bruce Rauner an ultimatum in the form of a five-step plan.

This move comes after the approval of a budget package and a move by Moody’s Investors Service to place the state’s general obligation rating under review for possible downgrade.

“The credit-rating agencies have indicated that the new revenue and spending cuts alone are not enough to insulate the state against further credit downgrades, including junk bond status,” Frerichs said in the statement. “I understand that Gov. Rauner disagrees with the elected members of the House and Senate. However, should he not take these necessary steps, he is inviting the credit-rating agencies to plunge Illinois into junk bond status, the results of which will lead to higher property taxes.”

To avoid the state moving into junk bond status, Rauner must undertake the following, Frerichs said:

  • Travel to New York, speak directly with the three ratings agencies, and convince them that he embraces the decision of the Legislature and will implement the budget package.
  • Immediately take visible, responsible steps to implement the $6 billion in bonding authority, which will yield $3 billion in additional federal dollars to pay down the $15 billion bill backlog.
  • Sign a funding model that ensures that local schools open on time.
  • Clearly and proactively communicate the new tax rates with Illinois employers to ensure that revenue estimates and cash-flow expectations are met.
  • Eliminate the “divisive rhetoric” that is impairing the state from moving forward. This divisiveness “counters the civility and bi-partisanship the rating agencies wish to see,” Frerichs said.

“The low rating from the rating agencies is reflective of the fact that Madigan’s 32% permanent tax increase will not solve the problems created by decades of unbalanced budgets, unfunded pension liabilities, borrowing, and high debt. Even with the tax increase, this budget remains $2 billion out of balance for fiscal year 2018,” Eleni Demertzis, a Rauner spokeswoman told CIO. “The best thing we can do is to work collaboratively to pass truly balanced budgets that pay down our debt, reform our pension system, and make the changes necessary to drive economic growth in our state. The Governor will continue to be a champion for the critical changes needed to get Illinois on a path to fiscal solvency.”

Earlier this year, Frerichs initially warned of credit downgrades and impending junk bond status for the state due to the inability to reach a budget agreement. If junk bond status is reached, the financial markets will become exasperated because some investors—including Illinois debt-purchasing entities with iron-clad constitutional guarantees—are restricted from doing business with junk bond-labeled entities.

Junk bond status will also terminate the state’s use of toxic credit-swap agreements, which will result in termination penalties of up to $107 million, as well as interest rate penalties which could be demanded by the lending agencies.

Illinois recently approved its first budget package in two years—a s$36.1 billion plan for thecurrent fiscal year, beginning July 1. The package reduces the state’s annual budget $3 billion, from last year’s annual spend of  $39 billion. Up to $ billion of the bill backlog could be addressed if the cuts are combined with new revenue and federal matching dollars.

Rauner has criticized the package, blaming the legislation for many of the issues the state currently faces in an op-ed piece he wrote for Crain’s Chicago Business. “The budget package ignored everything we need and want: property tax relief for families and businesses, regulatory relief to grow our economy, and term limits on politicians to restore confidence in our political system. This budget ultimately will require even more tax increases to balance future budgets and pay down our debt,” he wrote. “This is not the future that we imagined for Illinois. This is not who we are. We are not people who see problems and do nothing. We are not people who turn away from each other.”

Since Rauner took office in January, Illinois has suffered eight credit downgrades. Each downgrade involved the state’s bill backlog—now estimated to be $15 billion—the budget impasse, and other additional factors.

“This mix of revenue and cuts is far from perfect. It is, however, now the law and, if implemented, it is a critical first step to addressing Illinois’ deep, structural challenges,” Frerichs said. “It is clear that we will not begin to climb out of this debt if the Governor does not take the necessary steps to lead us away from the abyss.”


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