Sangamon Sun

Recent decisions by credit rating agencies to downgrade Illinois’ bond rating to near-junk status amounts to a pause before the general election after which the situation will get even worse, an industry consultant said.

"It's heartbreaking to watch," Mark Glennon, founder and managing director of Ninth Street Advisors, which provides consulting services to high-growth technology companies, said during a Sangamon Sun telephone interview. "I see no way to stop it at this point."

The rating agencies will be watching what the Illinois Legislature does after the general election but there is little the state's government can do to keep its bond ratings from dropping even further, Glennon said. "Unfortunately, I think the full gravity of the situation has yet to sink in," he said. "Especially not with Illinoisans and certainly not with the people in the Legislature."

Whether it sinks in or not, without dramatic — and likely impossible — changes in the state’s revenues, the ratings likely will fall even further, Glennon said. "Without that, the ratings agencies won't be satisfied," he said. "And that will lead to more downgrades, I'd say starting early next year."

In late September, Moodys and S&P Global Ratings dropped the state's credit and bond ratings. S&P Global Ratings dropped Illinois’' credit rating from BBB+ to BBB and assigned the state a negative outlook, which means the state can expect further S&P downgrades.

Moody's assigned a rating of Baa2 to Illinois for its General Obligation Refunding Bonds in October. Illinois' negative outlook is consistent with its potential for additional credit weakening following an extended political impasse that left Illinois increasingly vulnerable to adverse revenue trends and severely underfunded retiree benefit plans, Moody's said in that announcement.

Illinois has for months been on a ratings tumble. In June, before there was even a temporary budget agreement in place, the state's credit rating was so low that it was only two notches above junk status. The stopgap budget, which funded education and a few essential services through year's end, passed by legislators last summer, wasn't enough to calm the ratings agencies. In early September, Moody's issued warnings that the state's failure to achieve a balanced budget could lead to additional downgrades. At Baa2 with a negative outlook, Illinois has the lowest credit rating of any state in the nation.

Moody's has said there could be an upgrade in the state's future if certain things happen, such a implementing a realistic plan for long-term funding for pension and debt obligations. Moody's also recommend the state make progress to reduce its payment backlog, adopt of legal framework to prevent more unpaid bills from piling up and enact fiscal measures to sustainable, structural balance.

That amounts to the state finding revenue in the form of taxes and pension reform, which isn't likely, Glennon said. "What they're going to be looking for, when the Legislature reconvenes after the election, is for the state to find more revenue," Glennon said. "I see little hope of that happening."

Even if the Legislature did manage to find that revenue — presently considered politically impossible — it probably would not be enough to cover what the state owes, and bankruptcy, absent changing the state's constitution, is not a viable option, Glennon said.

The rating agencies, however, are waiting to see, Glennon said. "They're waiting to see if there's any significant change in attitude in the state Legislature," he said. "I think both sides are hoping to pick up more seats and both sides want to negotiate the best deal they can."