Illinois Budget Logjam Spurs Downgrades While Lawmakers Debate PieElizabeth Campbell
Illinois Governor Bruce Rauner agreed last week with lawmakers to designate pumpkin the official state pie. Reaching consensus on a budget is proving to be more difficult, and that’s starting to ripple into the bond market.
The Chicago school district’s credit rating was cut to junk on Aug. 14 as it waits on state help to close its deficit. Public university bonds may be downgraded, and securities sold by Chicago’s convention center slid after lawmakers failed to approve a deposit needed for debt bills. Even Rauner said he wouldn’t be surprised if there’s another cut to Illinois’s bond grade, which is already lower than any other state.
“As long as the budget impasse continues, the likelihood of a further downgrade does exist,” said Peter Hayes, who oversees $116 billion, including some Illinois holdings, as head of municipal securities at New York-based BlackRock Inc. The company isn’t buying state bonds amid the impasse.
Illinois has gone 49 days without a spending plan since the fiscal year started July 1 and there’s no end in sight. Rauner, the state’s first Republican governor in 12 years, and the Democrat-led legislature can’t agree on how to fix a $6.2 billion deficit that was left after temporary tax increases expired.
Rauner is calling for limits on the power of unions, changes to business regulations and spending cuts before agreeing to new taxes. Democrats want steeper levies on the highest earners, among other revenue-raising measures.
Illinois has had other budgetary jams, such as standoffs in the 1990s between the legislature and Republican Governor Jim Edgar, though none has lasted as long, according to the Civic Federation, a Chicago-based research group.
“There is no recent precedent in Illinois history for operating over two months into the fiscal year without a budget,” Laurence Msall, president of the federation. “In addition to being highly unusual, this extended impasse is also fiscally reckless and expensive.”
Investors have long penalized the state with higher borrowing costs. Yields on 10-year Illinois obligations reached 4.2 percent Tuesday, the highest among the 20 states tracked by Bloomberg. That’s almost 2 percentage points more than top rated debt, near the record high reached in October 2013.
And even without a budget, the state hasn’t been forced into a partial government shutdown. Illinois is paying its employees because of court orders, and money has been set aside for schools. The General Assembly may approve a bill this week, which Rauner said he’ll sign, that releases $5 billion of federal funds for social services.
The effects are beginning to be felt beyond the capital. In Chicago, school officials are waiting for the legislature’s help with pension costs that are fueling its own budget shortfall. Because of that gap, Standard & Poor’s on Aug. 14 lowered the district to BB, two steps below investment grade. That followed similar cuts since May by Fitch Ratings and Moody’s.
Investors who bought bonds sold by the Metropolitan Pier and Exposition Authority, which runs the largest convention center in the nation, have also taken a hit. When the budget’s delay prevented tax money from being transfered into its debt-service fund, S&P this month reduced its rating by seven notches. That caused its bonds maturing in 2050 to fall to an average of 100 cents on the dollar Monday from $1.05 on July 30. That pushed the yield up by more than a percentage point to 5.2 percent.
S&P reduced its outlook to negative from stable on some University of Illinois revenue bonds on Aug. 10, citing the lack of a budget and potential for funding cuts.
Illinois politicians are showing little haste in resolving the standoff. This week, Rauner was among those hobnobbing with voters at the state fair in Springfield, the capital, where politicians flock each year to glad-hand supporters, munch corn dogs and take in the agricultural bounty. House Speaker Michael Madigan is scheduled to be there for Democrat Day on Thursday.
“The longer it takes them to put together a final budget agreement, the greater the cost,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, a Chicago-based research group. “The more they’ll have to raise in taxes, and the more they’ll have to cut in spending.”
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