Moody’s Investors Service has placed the general obligation rating of the State of Illinois and the Chicago Board of Education under review for possible downgrade, the credit rating company said.
The state currently has a rating of Baa3, which is the lowest investment-grade rating on Moody’s credit rating scale. And any move lower would place the state’s credit status in subprime territory.
Moody’s said the possible downgrade for the state came after it failed to fully enact a timely budget for the fiscal year, which began July 1. It also cited the state’s failure to achieve broad political consensus on how to move toward balanced financial operations.
“The review process will also address the likelihood of further deterioration in Illinois’ most pressing credit challenges: its severely underfunded pensions and a backlog of unpaid bills, which has doubled during the past year.”
Illinois has outstanding debt of approximately $32 billion, of which 82% is general obligation.
“The state’s government in recent days has made legislative progress towards a fiscal recovery plan based on permanent income tax rate increases,” said Moody’s. “The decision to place the state’s ratings under review for downgrade incorporates our expectation that the legislature will implement revenue increases, overriding the governor’s vetoes.”
Meanwhile, Moody’s said its placement of the B3 general obligation rating of the Chicago Board of Education under review for possible downgrade was prompted by the state’s failure to provide timely operating aid to the district. This included delayed grant payments totaling $466.5 million, according to Moody’s.
“The state’s timeframe for remitting those payments to the district remains uncertain,” said Moody’s. “While the district may receive increased funding through the budget package currently being considered by the Illinois General Assembly, such increases may be insufficient to alleviate CPS’s distressed financial position.”
Moody’s said that because of the “extremely narrow reserves and limited financial flexibility,” the district must rely on either the state or the city of Chicago to maintain sufficient cash flow.
The review will take into consideration any move the state makes that may or may not address the district’s short-term liquidity needs and long-term budgetary problems.
“If there is no material increase in state support, Moody’s will assess what kind of support, if any, may be provided by the city,” said Moody’s. “The district has close management and governance ties to the city, which has significant legal flexibility to draw revenue from an extremely large and diverse tax base.”