Illinois is on track to become the US’ first 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 that the agency will likely 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 was not good on Saturday, as lawmakers meeting in Springfield, the state capital, for a special legislative session remained deadlocked with the start of the new fiscal year on Saturday next week approaching.
That should alarm everyone, not just those at the Illinois State Capitol, said Brian Battle, a 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?’”
Ratings agencies have been downgrading Illinois’ credit rating for years, although they have accelerated the process as the stalemate has dragged on between Illinois Governor Bruce Rauner, a Republican, and the Democrats who control the state’s General Assembly.
The agencies are concerned about Illinois’ massive pension debt, as well as a US$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 brinksmanship 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, just after lawmakers adjourned their regular session on May 31 without a deal.
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 would be 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.
Illinois 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.”
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