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Fitch cuts Illinois' credit rating on budget failure

CHICAGO (Reuters) - Fitch Ratings on Wednesday dropped Illinois’ credit rating by one notch to BBB, citing the state’s “unprecedented failure” to enact complete budgets for fiscal years 2016 and 2017.

It is the sixth downgrade by a major credit rating agency for Illinois, the lowest-rated U.S. state, since Governor Bruce Rauner took office in January 2015. The BBB rating for the state’s $26 billion of outstanding general obligation bonds is just two notches above the junk level.

Illinois is limping its way through a record-setting second-consecutive fiscal year without a complete budget due to an ongoing feud between the Republican governor and Democrats who control the legislature. A six-month fiscal 2017 budget expired on Dec. 31.

Since then, the Democratic and Republican leaders of the Senate unveiled a bill package aimed at ending Illinois’ budget impasse and addressing the state’s deep fiscal woes.

But Fitch said the damage already has been done in terms of a growing pile of unpaid bills and reduced financial flexibility for the nation’s fifth-biggest state.

“Even if the current attempts at a resolution to the extended impasse prove successful, Fitch believes that the failure to act to date has fundamentally weakened the state’s financial profile,” the credit rating agency said in a report.Fitch kept the state on a ratings watch list for another six months, warning that if Illinois continues on its current path, a further downgrade would be warranted.

Catherine Kelly, Rauner’s spokeswoman, said in a statement that the latest downgrade “further demonstrates the importance of reaching bipartisan agreement on a truly balanced budget and changes that will grow our economy and bring new jobs to our state.”

The Senate legislation, which could be voted on by the chamber next week, would raise income taxes by a third, borrow $7 billion to winnow down a record-setting pile of unpaid bills and open Chicago for the first time to legalized casino gambling.

It also includes items on Rauner’s wish list, including a possible fix for the state’s $130 billion pension crisis, changes in how workers are compensated for on-the-job injuries and the imposition of term limits on legislative leaders.

In order to put pressure on lawmakers, Illinois’ attorney general this week asked a judge to stop the state from paying its workers due to the lack of appropriation for their salaries.

Reporting By Karen Pierog; editing by Diane Craft