May 11, 2017 / 6:54 PM / 2 years ago

Fear of junk bond ratings hangs over Illinois budget crisis

CHICAGO, May 11 (Reuters) - Illinois faces costly consequences if it fails to pass a budget by the end of May and is hit with more credit rating downgrades, state lawmakers were warned this week.

John Miller, co-head of fixed income at Nuveen Asset Management, told a House committee on Thursday that reaching a balanced budget deal by May 31 is “absolutely critical” for the nation’s fifth-largest state.

He said the move could stabilize or improve Illinois’ triple-B credit ratings, which are two notches above junk and the lowest among U.S. states. Without a budget agreement, Illinois risks falling into junk, where the pool of investors willing or able to purchase its debt is much smaller, he added.

Miller said contagion from Illinois’ shaky credit standing has spread to other municipal bond issuers in the state, resulting in an extra $930 million in annual debt service paid statewide.

Illinois is limping toward the June 30 end of a second straight fiscal year without a complete budget, something no state has ever done, due to an impasse between its Republican governor and Democrats who control the legislature.

As a result, its pile of unpaid bills, a barometer of the state’s structural deficit, has topped $13 billion. Major rating agencies, which have pushed Illinois down the credit scale six times since Governor Bruce Rauner took office in January 2015, have signaled more downgrades are possible.

“If the impasse continues, that’s significant bad news for the state’s credit position in our view,” Moody’s Investors Service analyst Ted Hampton said Thursday.

Records from S&P, Moody’s, and Fitch Ratings dating back about half a century or more show no states rated junk.

After voting on a bipartisan bill package aimed at ending the stalemate stalled again in the Senate late Wednesday, Senate President John Cullerton said entering a third straight fiscal year without a spending plan and adequate revenue will lead to junk bond ratings for Illinois.

One of the bills in the package dubbed the grand bargain would authorize the state to sell $7 billion of seven-year bonds to pay off bills.

On Monday, Illinois Treasurer Michael Frerichs, a Democrat, said Illinois will be paying “significantly more interest” on future bond issues unless a budget is passed.

“Money, instead of going to pay bondholders, should be going into our roads, into our buildings, into our education system,” he told a news conference.

Illinois is already paying much higher borrowing costs than other states. (Reporting by Karen Pierog; Editing by Matthew Lewis)

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