CHICAGO, March 14 (Reuters) - Increased revenue could save Illinois’ credit rating from slipping one notch to junk, S&P Global Ratings said on Thursday as it affirmed the state at BBB-minus ahead of an upcoming $455 million bond sale.
The credit rating agency said while the likelihood of the state experiencing a liquidity crisis in the near term has subsided, liquidity remains “paramount” to future rating actions.
“If Illinois is unwilling or unable to pass a revenue increase within the next two years, absent significant expenditures cuts, we would likely lower the rating,” S&P said in a report.
Democratic Governor J.B. Pritzker has proposed a plan to boost revenue by $3.4 billion annually by amending the state constitution to allow for graduated income tax rates instead of the current flat rate.
A three-fifths majority vote in the Democrat-controlled legislature would be needed to place an amendment on the November 2020 ballot.
S&P also called Pritzker’s proposed nearly $39 billion general funds fiscal 2020 budget “dubiously balanced,” noting that it plugs a $3.2 billion gap with reduced pension contributions, more optimistic revenue assumptions, $1.1 billion in new revenue, and other steps.
Pritzker met with rating agencies and bond investors on Monday. In a nearly one-hour audio recording posted on Illinois’ budget office website, investors raised questions about the state’s huge $133.5 billion unfunded pension liability.
The governor said he opposed changing the Illinois Constitution to remove protections for public worker retirement benefits that have stymied past attempts to reduce costs.
He also defended his proposal to lengthen Illinois’ current 50-year pension payment schedule by seven years, a move that would reduce the state’s fiscal 2020 contribution by more than $800 million.
“I put together a package that I think helps us do the two things you need us to do - pay the pensions and keep investing in the things that matter,” Pritzker said.
That package would direct $200 million of the higher revenue from a graduated income tax rate system to pensions, a move that S&P said “falls short of making significant progress.” It also includes a $2 billion pension bond sale and the allocation of yet-to-be-determined state assets toward the retirement systems.
Most of the proceeds from the upcoming general obligation bond sale will help fund a pension benefit buyout program approved last year as a way to lower costs. Illinois has the lowest ratings among U.S. states. (Reporting by Karen Pierog in Chicago Editing by James Dalgleish)