Illinois could be 1st state with 'junk' credit due to budget

CHICAGO -- Illinois is on track to become the first U.S. state to have its credit rating downgraded to "junk" status, which would deepen its multibillion-dollar deficit and cost taxpayers more for years to come.

S&P Global Ratings has warned the agency likely will lower Illinois' creditworthiness to below investment grade if feuding lawmakers fail to agree on a state budget for a third straight year, increasing the amount the state will have to pay to borrow money for things such as building roads or refinancing existing debt.

The outlook for a deal wasn't good Saturday, as lawmakers meeting in Springfield for a special legislative session remained deadlocked with the July 1 start of the new fiscal year approaching.

That should alarm everyone, not just those at the Capitol, said Brian Battle, director at Performance Trust Capital Partners, a Chicago-based investment firm.

"It isn't a political show," he said. "Everyone in Illinois has a stake in what's happening here. One day everybody will wake up and say, 'What happened? Why are my taxes going up so much?'"

Here's a look at what's happening:

Why now?

Ratings agencies have been downgrading Illinois' credit rating for years, though they've accelerated the process as the stalemate has dragged on between Republican Gov. Bruce Rauner and the Democrats who control the General Assembly.

The agencies are concerned about Illinois' pension debt, as well as a $15 billion backlog of unpaid bills and the drop in revenue that occurred when lawmakers in 2015 allowed a temporary income-tax increase to expire.

"In our view, the unrelenting political brinkmanship now poses a threat to the timely payment of the state's core priority payments," S&P stated when it dropped Illinois' rating to one level above junk.

Moody's did the same.

What is 'junk' rating?

Think of it as a credit score, but for a state (or city or county) instead of a person.

When Illinois wants to borrow money, it issues bonds. Investors base their decision on whether to buy Illinois bonds on what level of risk they're willing to take, informed by the rating agencies such as Moody's assign.

A junk rating means the state is a higher risk of not repaying its debt. At that point, many mutual funds and investors -- who make up more than half the buyers in the bond market -- won't buy. Those willing to take a chance, such as distressed debt investors, will do so only if they are getting a higher interest rate.

What will it cost?

Battle said the cost to taxpayers in additional interest the next time Illinois sells bonds, which it inevitably will need to do in the long term, could be in the "tens of millions" of dollars or more.

The more money the state has to pay on interest, the less that's available for things such as schools, state parks, social services and fixing roads.

"For the taxpayer, it will cost more to get a lower level of service," Battle said.

Comptroller Susana Mendoza, who controls the state checkbook, agreed.

"It's going to cost people more every day," she said. "Our reputation really can't get much worse, but our state finances can."

Other effects?

Because the state historically has been a significant funding source to other entities, such as local government and universities, many of them are feeling the effect of Illinois' worsening creditworthiness already.

S&P already moved bonds held by the Metropolitan Pier & Exposition Authority and the Illinois Sports Facilities Authority -- the entities that run Navy Pier, McCormick Place and U.S. Cellular Field -- to junk.

Five universities also have the rating: Eastern Illinois University, Governors State University, Northeastern Illinois University, Northern Illinois University and Southern Illinois University.