Illinois is on the brink of becoming the first U.S. state with a junk rating following a downgrade by S&P Global Inc. on Thursday.
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The ratings firm cited Illinois' partisan gridlock and inability to pass a budget as reasons for dropping the grade on the state's general obligation bonds one level to BBB-, the lowest possible investment grade rating.
Illinois hasn't had a budget for two years due to a standoff between the Republican governor and Democratic legislature.
S&P said it would likely downgrade the state's debt to junk status if lawmakers fail to pass a deficit-reducing budget by July 1, the start of the new fiscal year. The operating deficit for the current fiscal year is $5.7 billion, according to Moody's Investors Service.
"In our view, the unrelenting political brinkmanship now poses a threat to the timely payment of the state's core priority payments," S&P analyst Gabe Petek said in his ratings report.
Moody's and Fitch Ratings have rated Illinois at two notches above junk. Analysts for all three firms have said that Illinois has significant economic strengths and that its deteriorating credit is in large part a result of political decisions.
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Prices on some Illinois general obligation bonds fell to about 99 cents on the dollar Thursday after trading as high as 105 cents earlier in May.
Without a budget the last few years the state has been unable to raise taxes, cut revenues or address an underfunded pension system. Nonprofit agencies that provide social services have gone unpaid and the state universities have made cuts and raised prices.
The S&P downgrade on Thursday applied to $26.3 billion in general obligation bonds. S&P also lowered to junk $3.1 billion of bonds that can only be paid if lawmakers allocate funds from the state budget, such as debt issued by the authority that runs Chicago's convention center.
Write to Heather Gillers at firstname.lastname@example.org
Corrections & Amplifications
This article was corrected at 5:27 p.m. ET because the original version incorrectly stated the amount of bonds affected in the final paragraph. The S&P downgrade on Thursday applied to $26.3 billion in general obligation bonds.
"S&P Downgrade Brings Illinois Debt One Step Closer to Junk," at 5:04 p.m. EDT June 1, incorrectly stated the amount of bonds affected in the final paragraph. The S&P downgrade on Thursday applied to $26.3 billion in general obligation bonds. (June 1)
(END) Dow Jones Newswires
June 01, 2017 17:41 ET (21:41 GMT)