CHICAGO, March 19 (Reuters) - Illinois’ credit woes are spreading to public universities and governments that have ties to appropriations from the cash-strapped state.
Moody’s Investors Service late on Monday downgraded the credit ratings of four universities and revised the rating outlooks on four others to negative because of their reliance on state funding and the negative outlook it slapped on Illinois’ A2 rating in December.
The actions affect about $2.5 billion of outstanding debt.
The credit rating agency also warned that further deterioration of Illinois’ general obligation rating, future higher education funding cuts and payment delays could also pull the universities’ ratings down.
The rating actions on the universities followed the multi-notch downgrade last week of Chicago’s $181 million of outstanding motor fuel tax debt to A3 from Aa3, based in part on the state’s deteriorating credit quality.
Illinois’ public pension system, the worst-funded among states, has been a crushing credit concern as lawmakers struggle to rein in costs while satisfying state constitutional provisions protecting retirement benefits.
As a result, credit rating agencies have been hammering Illinois’ ratings to the lowest levels among states and bond investors have been demanding higher yields to buy its debt.
Moody’s said a review it launched in December was due to the universities’ significant dependence - ranging from 31 percent to 46 percent - on Illinois for operating revenue and continued delays in the payment of those funds.
The University of Illinois, the biggest state system, received a negative outlook on its long-term ratings of Aa2, Aa3 and A1, affecting $1.56 billion of debt. The system has had to resort to tuition hikes, unpaid days off for workers and salary freezes to cope with the state’s financial problems, according to Tom Hardy, executive director of university relations.
“It makes it all the more challenging to manage our cash flow and our fiscal situation,” he said. Illinois’ fiscal year ends in about three months, but the state still owes the system $480 million, or about 72.5 percent of its annual appropriation, Hardy said. He added that the university’s fiscal 2014 funding could be cut by 4.9 percent to $630 million under Governor Pat Quinn’s proposed budget.
Eastern Illinois University, which Moody’s downgraded to A3 from A2, has received only 20 percent of its $44 million annual appropriation and could have a $2.2 million funding cut in fiscal 2014, said Paul McCann, the university’s treasurer and business services director.
“Certainly we are disappointed, but with the current condition of the state, we understand the decision of the rating agency,” he said.
Illinois stands alone among states in the use and scope of unpaid bills and other obligations to keep its budget afloat. On Tuesday, the bill total topped $7 billion, according to the Illinois Comptroller’s website.
The governor has warned that escalating annual pension payments are squeezing out money needed for core state services such as education, health care and public safety. Illinois has a huge $96.8 billion unfunded liability for its five pension funds and a funding rate of only 39 percent that is well below the 80 percent level considered healthy.
Moody’s lowered ratings a notch to A3 for Northern Illinois, Governors State, and Northeastern Illinois universities in addition to that of Eastern Illinois.
Along with the University of Illinois, rating outlooks were revised to negative for Illinois State, Western Illinois and Southern Illinois universities.
As for Chicago’s debt downgrade, Moody’s pointed to Illinois’ worsening credit quality and the state’s ability to alter pledged motor fuel tax revenue by reducing tax rates, tapping the revenue for state operations or reducing allocations to cities.