To subscribe to Capitol Fax, click here. *** UPDATED x2 - Rep. Greg Harris responds *** Could Moody’s downgrade Illinois even after an override? Wednesday, Jul 5, 2017 * Media advisory… Moody’s has placed the State of Illinois’ Baa3 rating on review for possible downgrade. The review incorporates our expectation that the Illinois House of Representatives will override Governor Rauner’s veto and implement revenue increases as part of the budget proposal. The review will assess the budget plan’s credit implications and address the likelihood of further deterioration in the state’s most pressing credit challenges: · Pension liabilities (appx. $251 billion in FY ending June 30, 2016)

· Backlog of unpaid bills (appx. $15 billion) Moody’s places ratings on review when a rating action may be warranted in the near term, but when further information or analysis is needed to reach a decision. A majority of reviews are concluded within 30 to 90 days. * More… New York, July 05, 2017 — Summary Rating Rationale Moody’s Investors Service has placed the general obligation rating of the State of Illinois, currently Baa3, under review for possible downgrade following the state’s failure to fully enact a timely budget for the fiscal year that began July 1, and its failure to achieve broad political consensus on how to move toward balanced financial operations. The review also applies to several related state debt ratings: the Baa3 assigned to sales-tax backed Build Illinois bonds and the Ba1 ratings assigned to Illinois subject-to-appropriation bonds, the convention center bonds issued by the Metropolitan Pier and Exposition Authority and bonds issued under the state’s Civic Center program. Illinois has outstanding debt of about $32 billion, of which 82% is general obligation. The state’s government in recent days has made legislative progress towards a fiscal recovery plan based on permanent income tax rate increases, after going through two fiscal years without a complete budget in place. The decision to place the state’s ratings under review for downgrade incorporates our expectation that the legislature will implement revenue increases, overriding the governor’s vetoes. The review will provide a limited amount of time for the Illinois General Assembly to finish voting on the measures, and for assessment of the plan’s credit implications. The review process will also address the likelihood of further deterioration in Illinois’ most pressing credit challenges: its severely underfunded pensions and a backlog of unpaid bills, which has doubled during the past year. Despite the progress toward budget balance that the emerging fiscal plan embodies, the plan entails substantial implementation risk. The governor yesterday vetoed the plan’s revenue, spending and implementation legislation, citing a $2 billion current-year deficit and the plan’s failure to incorporate proposals in areas such as workers compensation insurance reform and caps on local property taxes. The plan’s approval relied almost entirely on Democratic party support in the state’s senate, and a vote to override the governor’s vetoes of the measures has been deferred by the state’s house of representatives. The plan therefore appears to lack broad bipartisan support, which may signal shortcomings in its effectiveness once implemented. In addition, the state’s baseline tax collections declined in fiscal 2017, suggesting that any tax increase may yield less revenue than anticipated in coming months. So far, the plan appears to lack concrete measures that will materially improve Illinois’ long-term capacity to address its unfunded pension liabilities. A June 30 order from a federal judge that the state accelerate payments owed to Medicaid managed care organizations and service providers cast doubt on the state’s immediate ability to keep up with its statutory pension contribution schedule while also meeting obligations for debt service, payroll and school funding. The state anticipates addressing its approximately $15 billion backlog of payments owed partly through a bond offering that probably will rank among the largest in the state’s history. This component of the state’s broader fiscal plan leaves Illinois not only dependent on market access to ease liquidity pressures, but also facing a significant increase in its tax-supported debt burden. Moreover, the effectiveness of the state’s strategy to contain and reduce its deferred bills, once the backlog-financing debt has been issued, remains to be seen. Whew. It never ends. * By the way, the lead House Democratic budget negotiator Rep. Greg Harris told me this about a recent Tribune story claiming that the bill backlog could be reduced as much as $8 billion… $6 billion is the total that could be authorized. Currently the revenue available would support $3 billion which could turn to $5 billion if it is used to pay down [federally] matchable Medicaid bills. Should another revenue source become available you could have another $3 billion issuance. $5 billion is only about a third of the current backlog. …Adding… Rep. Harris just sent me another text… There are several other sources to pay down old bills besides bonding. There is $1.2 billion in interfund borrowing, $300 million in limited sweeps, about $800 million in EAF and CHSF and several hundred million from Drug Rebate Fund so the total resources added to the GO bonding would make about $8 billion available for backlog of bills *** UPDATE 1 *** Just for clarity, I followed up with Moody’s and asked: “So, are you saying that Illinois could still get downgraded even if the House overrides the governor’s vetoes?” The response from Joe Mielenhausen… Essentially, yes. We are anticipating that the House will override the veto and the budget plan will be implemented, but essentially we’re now reviewing how the budget implementation will impact the state’s two most pressing credit challenges – pension liabilities and the backlog of unpaid bills – and whether this mitigation will be enough to avoid another downgrade. *** UPDATE 2 *** House Democratic budget negotiator Rep. Greg Harris… All 3 rating agencies have been clear that we must override the Governor tomorrow or we could hit junk bond status. Moody says they assume we will override and “….will provide a limited amount of time for the General Assembly to finish voting”. That time will be tomorrow afternoon. Passing a balanced budget is clearly the single most important thing we must do to start stabilizing our State. - Posted by Rich Miller

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