Citing Illinois’ massively underfunded pension liability as a major financial pressure, S&P Global Ratings dropped the state’s credit rating one notch to BBB on Sept. 30. Illinois is facing an unfunded pension liability of more than $111 billion, the largest in the country. The credit agency also cited “continued weak financial management” as a reason for its decision in addition to the state’s unpaid bill backlog totaling more than $8 billion.
The lower investment grade of BBB, just two levels above junk status, can make it more costly for the state to borrow money as interest rates are higher.
Republicans say this is another reason Illinois must pass a constitutional pension reform law and pass a balanced budget with structural reforms that will grow Illinois’ economy, create jobs, and move the state forward fiscally. S&P noted another downgrade is possible if Illinois isn’t willing to “adopt a long-term structural budget solution.”
In related news this week, the Rauner Administration took steps to reduce the state’s financial risk on interest rate swaps and letters of credit dating back to the administrations of former Governors Blagojevich and Quinn.
The Rauner Administration completed negotiations with banks that hold the state’s swaps and said “the new terms are more favorable to the state and reduce the state’s financial risk. Under the new terms, the state is less likely to have the swaps terminated and owe a payout to the banks because the credit rating thresholds that allow the banks to terminate have been lowered. These new terms are better for the state than the terms agreed to by the Quinn administration in 2013 and the Blagojevich administration in 2003.” The Rauner Administration also said that this action will increase the ability to direct the state’s limited resources to education and social services.