"Now The Pain Begins": S&P, Moodys Cut Illinois To Near Junk, Lowest Ever Rating For A U.S. State

Tyler Durden's picture

The monetary problems plaguing the state of Illinois (not to mention its public pensions) have been widely documented here over the past few years, and today the rating agencies finally noticed, when in the span of a few hours, first S&P, then Moody's downgraded Illinois to BB+/Baa3, respectively, both just one notch above junk, the lowest rating ever given to a U.S. state, as both agencies cited a long-running political stalemate over a budget shows no signs of ending.

In the first downgrade, S&P warned that Illinois is at risk of soon losing its investment-grade status, an unprecedented step for a state that would only deeper the government’s strain. Bypassing its traditional 90-day review, S&P said Illinois will likely be downgraded around July 1, when the new fiscal year begins, if leaders haven’t agreed on a budget that starts addressing the state’s chronic deficits.

In a statement, S&P analyst Gabriel Petek said that "The unrelenting political brinkmanship now poses a threat to the timely payment of the state’s core priority payments." 

Petek's ire was prompted by Illinois' inability to pass a budget for the past two years amid a clash between the Democrat-run legislature and Republican Governor Bruce Rauner. The ongoing confrontation has left the fifth most-populous US state with a record $14.5 billion of unpaid bills, ravaged entities like universities and social service providers that rely on state aid and undermined Illinois’s standing in the bond market, where investors have demanded higher premiums for the risk of owning its debt, Bloomberg reported.

The S&P analyst added that "the rating actions largely reflect the severe deterioration of Illinois’ fiscal condition, a byproduct of its stalemated budget negotiations."

In a similar statement, Moody's said that "legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance, allowing a backlog of bills to approach $15 billion, or about 40% of the state's operating budget. During the past year of fruitless negotiations and partisan wrangling, fundamental credit challenges have intensified enough to warrant a downgrade, regardless of whether a fiscal compromise is reached in an extended session."

The rating agency added that "the downgrade to Baa3 for Illinois' GO bonds is consistent with the state's intensifying pressure from pension liabilities; by our calculation, the state's unfunded pension liability for its five major plans in aggregate grew 25% in the year ended June 30, 2016, to $251 billion."

And like S&P, Moody's kept the state on negative outlook, citing the potential for additional credit weakening "because of a continuing political impasse that has left Illinois increasingly vulnerable to adverse revenue trends and severely underfunded retiree benefit plans."

The downgrades, which also pushed some debt backed by legislative appropriations into junk, came a day after Illinois’s legislature blew the deadline for approving a compromise budget by a simple majority. Now, it gets even more difficult as it will take a higher threshold, or three fifths majority vote in each legislative chamber, to pass anything which effectively guarantees that one month from today Illinois will be America's first ever Junk rated state.

On Wednesday, governor Rauner, who is up for re-election in 2018, and Democratic House Speaker Michael Madigan, who controls much of the legislative agenda, faulted each other for the unprecedented gridlock. The governor also held Democrats responsible for Thursday’s rating cut.

Cited by Bloomberg, a spokeswoman for Rauner said that “Madigan’s majority owns this downgrade because they didn’t even attempt to pass a balanced budget, get our pension liability under control, and other changes that would put Illinois on better financial footing. The governor will continue working toward a truly balanced budget with changes to our system to grow jobs and provide real and lasting property tax relief.”

“Her comment is typical Rauner incompetence, and that’s too bad,” said Steve Brown, a spokesman for Madigan.

Meanwhile, as the political circus continues, Illinois' unpaid bills are piling up. 

By June 30, the state will owe an estimated $800 million in interest and fees on the unpaid bills that have been piling up, according to estimates from Comptroller Susana Mendoza, a Democrat. She warned of "dire" consequences for residents if a budget isn’t reached by the start of fiscal year 2018 on July 1, including the shuttering of more social service providers and layoffs at public universities. With only a month to go before the start of fiscal year, the ratings cut wasn’t unexpected.

“We’re going to start to see some real pain now,” Senate President John Cullerton told reporters in Springfield on Wednesday. “We’re going to start to see downgrades. We don’t have any funding for schools. We don’t have any funding for higher end and a bunch of social programs. We don’t have a budget.

Just like Venezuela, despite not having a budget, Illinois has dutifully continued to cover payments due on its bonds, and, like other states, has no ability to resort to bankruptcy to escape from its debts.

For now. A downgrade to junk, though, would add even more financial pressure by increasing the state's borrowing costs and preventing many mutual funds from buying Illinois’s securities.

To be sure, today's announcement did not come as a surprise to markets: Illinois’s 10-year bonds already yield 4.4%, 2.5 percentage points more than those on top-rated debt. That spread is the highest since at least January 2013 and more than any of the other 19 states tracked by Bloomberg. In fact, ths spread to AAA debt is now the highest on record.

Discussing next steps, Dennis Derby, a money manager at Wells Fargo which holds Illinois bonds among its $40 billion of municipal debt said “It wouldn’t be too far of a stretch at this point” to get to junk, , said in an interview before S&P’s downgrade. “I don’t know if being downgraded to junk would motivate the state to come together. You would think getting downgraded to a BBB would have motivated them and it didn’t."

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Argenta's picture

Illinois is a joke.  Seems like they don't have a problem funding exorbitant teachers' retirement.


101 years and counting's picture

neither does the country.  but the country (and other countries) are able to just print money out of thin air on a fucking laptop and tranfer those made up funds to bankers to solve their problems.  maybe janet can print a measly 50B to solve all of IL's problems???

Jim Sampson's picture

This is what happens when you fuck a stranger in the ass.

American Psycho's picture

As an illustration of our current financial envirnonment, one-step above junk is only 250 bps premium of AAA. I wouln't give IL any money for less than a double digit coupon.  

JRobby's picture

Only the beginning as the pension bill comes due.....everywhere!

American Psycho's picture

You are spot on buddy.  I was laughing with a friend that the IL 10Y is only 100 - 150 bps above the rate I would get for an auto loan, and that is with an 800 FICO.  Glad to see the near junk status of IL is "priced in." Welcome to the new perma zero environment. 

CheapBastard's picture

Dozens of teachers are rich, fat rich, with pensions worth over $5 million. Time to go belly up and go bankrupt and renegotiate these issues back to reality.

Mike in GA's picture

And Rahm has money for illegals to find sanctuary.


booboo's picture

Just more DemoKrazy moves that will drive once blue dog democrats over the wire and into alternative political parties and killing the left tards

Hal n back's picture

If we have not learned by now that Democrates don't give a shit about money or debt, and Republicans almost don't give a shit, we begin to understand our probems.

The worst part is too many people believe the shit that they can get a free lunch.



jcaz's picture

"Dozens"?   "$5 million"?

Umm, no.

Try "Thousands" and "Up to and many beyond $25M in their total package"

It's more insane than most people realize, all public info......

Creative_Destruct's picture

Everyone was sold the bill of goods that they were all going to wealthy retirement heaven by the grace of the money printing fueled bubble economy and stock market of the past 30 years and now reality is having her curtain call.

And reality is a BITCH.

yogibear's picture

Best thing for Illinois to do is cap the pensions at  a max  payout  of $60,000/per person per year.

Then the other economics would be solved.  No double and triple dipping like a lot of these people are doing.

Admins are  maaking over $200,000/year in pensions. 


Hal n back's picture

adminstrators are getting over 300k a year

legilators will not recuse themselves on this as they are beneficiaries of the pension system.

The problems are unfixable except by bankruptcy which will happen.

a second chance will be given and pensioneers will see their benefits and health benefits severely cut.

JB Pritzker is runnign for Gov and already he, a democrate, is promising to retain benefits.

The shit never stops.

nor will it for the US government.



Westcott Canon's picture

I see pension haircuts in the future. Buzzcuts for everyone. 

Vilfredo Pareto's picture

It better be a buzzcut rather than a national bailout

Vilfredo Pareto's picture

It better be a buzzcut rather than a national bailout

Boris Badenov's picture

Huh huh, Beavis, he said Coupon......what are you, a fartknocker or something?

yogibear's picture

John Cullerton and Michael Madigan are a huge problem. They kept giving to the public unions and Chicago. Now it's time to pay.

Hal n back's picture

Cullerton is part of the PJ Cullton family who ran the chicago machine 50 years ago

RedBaron616's picture

At some point, the money printing stops. Then everything collapses. After all, the only thing backing the US dollar is blind faith. Eventually, everyone will get wise to the continual devaluation and stop taking it. Then we will suddenly become a Third World country.

peopledontwanttruth's picture

Give that man a Ceeeegar, bingo.

Librarian's picture

But will we still run Barter Town?

That is the question.

yogibear's picture

Janet and her 12 print happy presidents wouldn't hesitate printing hundreds of trillions of US dollars to bail everything out. 

yogibear's picture

It's the Chicago area sucking up all the funds. It's a lost cause.

The more money you give them the deeper hole they will dig.

They will not control spending.

Raffie's picture

They clearly need more innocent refuges to fix this issue.

peopledontwanttruth's picture

And all the kings horse and all the kings men couldn't put Illinois back together again

mkkby's picture

Illinois has WAY TOO MUCH money.  The problem is they spend it on graft and nepotism.  No pencils in the class room, but each kid has 500 bureaucrats each making $200k.

Spend just a little more on rope.

JRobby's picture

 Rod Blagojevich stood alone in a stark prison room in Colorado on Tuesday while his family sobbed in a Chicago courtroom a thousand miles away.


serotonindumptruck's picture

Has it ever been determined who it was exactly that Rod Blagojevich pissed off?

Was it Barrack Hussein Obama?

Under the Chicago Rules of Corruption, the former governor apparently did everything that was required or expected of him.

Obviously, Blagojevich didn't grease the right palms when he tried to sell Obama's Senator seat.

ghengis86's picture

Funny, cause us who thought we were in the know asked the very damn same thing. Now we're all confused and are resigned to "fuck them all" which is a microcosm for Trumps win. We don't know, don't care, if the smooth talker fails, no love lost.

fiftybagger's picture

You people have very short memories.  You don't remember him standing with strikers and announcing that they would be boycotting Bank of America?  He was arrested the next day.


Agstacker's picture

lol I'd upvote you 2x if I could.

Hal n back's picture

Obama wanted to sell it and Blogo pissed him off.

SethDavis's picture

Or funding boondoggle CTA transit programs in Chicago (Belmont Flyover which will cost in excess of $2b). Calling Snake Plisken....Escape from Illinois. 

justin423's picture

Kansas and Oklahoma are next

Hal n back's picture

Illinois has been run by Democrats for decades. It is in deep financial trouble. Who should be blamed.

California has been Democratic for Decades. It has similar problems

The Federal Government has been run by both parties. But Social Security, Medicare and Obamacare were products of Democrats.

Anybody see  a pattern here?

The Republican problem  and contribution to this, is an inability to change anything.



Freddie's picture

Look at that fat disgusting shit Bertha Lewis the President of ShitCongo Teachers Union. 

Give me some of them ShitCongo Munis.  LOL! 

Buck Johnson's picture

And when this bubble implodes many of these civil servants are going to get a very rude awakening.  Can you say at least half your pension being slashed if not more?


Hitlery_4_Dictator's picture

Don't you dare flee you scumbags in IL, you created it now stay put.

RedBaron616's picture

Do you really believe that the average citizen has any control on what the state government does? Do you? Don't act like the GOP is so fiscally responsible. Look at their deficits on the national level, piling more debt onto the National Debt. This after crying crocodile tears about the National Debt when they were in the minority. Why I refuse to vote for either of the two main CORRUPT political parties.

HominyTwin's picture

Well, technically speaking, both parties do that: complain about deficit spending when in the minority, and then deficit spend when in the majority.

peopledontwanttruth's picture

It's almost like one party.

Like a husband and wife who kept their given names but when in control of the checking account/credit cards every 2-4 years bankrupts the household then blames the other half.

44magnum's picture

It is one party The BCP

Bankers Con Party

Vilfredo Pareto's picture

DC Party

Government Party


We do need to settle on a name lol.

HoyeruNew's picture

no, no no man, you're NOT supposed to spread real facts, all you're supposed to do is scream "Liberals this" and "Liberals that"! What are you, a truther????

Playtime's Over's picture

Mebbie, truth is liberals are scum.