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Rating Action:

Moody's confirms Illinois' Baa3 GO and related ratings, affecting $32 billion of debt; outlook negative

Global Credit Research - 20 Jul 2017

New York, July 20, 2017 -- Summary Rating Rationale

Moody's Investors Service has confirmed the State of Illinois' general obligation bond rating at Baa3, following passage of budget legislation that alleviates immediate liquidity pressures, moves the state closer to fiscal balance and should keep pension and other fixed costs at manageable levels at least in the near term. The rating confirmation, which also applies to state debt linked to the GO (and listed at the end of this section) ends a review for possible downgrade that began July 5. Debt outstanding for all affected securities totals about $32 billion, though not all the non-GO issues have a Moody's rating. The state's outlook is negative.

The budget legislation includes income tax increases that the state expects will generate about $5 billion in fiscal 2018, which began July 1. Together with internal and external borrowing provisions in the legislation, the tax increases will help contain a backlog of unpaid bills that has been hovering above $14 billion in recent weeks. The legislation brought an end to a two-year period in which the state operated without a comprehensive budget, covering many of its expenses under court orders or consent decrees rather than standard appropriations. It highlighted two of Illinois' intrinsic strengths: sovereign control over its taxing and spending policy and a diverse economy with the capacity to generate additional revenue.

While budget passage alleviates immediate threats to the state's credit, long-term challenges remain. The outsized net pension burden (shown above as a share of revenue compared with state medians) will keep growing in coming years, despite certain reforms included in the budget legislation. Reducing and containing the backlog over the long term will likely depend on repeated operating surpluses, which the state has not produced in recent memory.

Related, Non-GO Debt Affected

The confirmation action also applies to several other types of debt linked to the state's credit: sales tax-backed Build Illinois bonds, which were confirmed at Baa3; the Metropolitan Pier and Exposition Authority's McCormick Place convention center bonds, confirmed at Ba1; and the state's Civic Center program bonds, also confirmed at Ba1. The rating on the state's Build Illinois sales-tax bonds is capped at the government's GO rating, based on the sales tax revenues' lack of sufficient protection from general state operating needs. Both the Metropolitan Pier and the Civic Center program bonds are a notch below the state's GO based on the need for annual legislative appropriation of payments.

Rating Outlook

The negative outlook is based on the implementation risks in the enacted budget (such as the potential failure to realize expense reductions or revenue increases anticipated under the enacted budget), expectations of continued pension liability growth and potential vulnerability to national economic downturns or other external factors.

Factors that Could Lead to an Upgrade

Implementation of a realistic plan to provide long-term funding for pension obligations

Progress in reducing payment backlog and adoption of legal framework to prevent renewed build-up of unpaid bills

Enactment of recurring fiscal measures that support expectation of sustainable, structural balance

Factors that Could Lead to a Downgrade

Structural imbalance that leads to renewed build-up of unpaid bills following issuance of debt to pay down backlog

Efforts to obtain near-term fiscal relief by reducing pension contributions

Political paralysis that results in failure to provide for timely payment of subject-to-appropriation debt

Difficulty managing the impacts of an economic downturn, a reduction in federal Medicaid funding or other unexpected adverse event

Legal Security

The state's general obligation bonds are secured by its full faith and credit pledge. The state's Build Illinois Bonds are backed by a pledge of statewide sales tax. Bonds issued by the Metropolitan Pier & Exposition Authority are secured in the first instance by tourism-related taxes collected by the authority in the Chicago area, and state sales taxes are pledged to cover any deficiencies in these collections. Payment on the Metropolitan Pier bonds is subject to annual appropriation by the state legislature.

Use of Proceeds

Not applicable

Obligor Profile

Illinois is the fifth most populous state in the US, with estimated 2016 population of 12.8 million. Almost three quarters of its residents live in and around Chicago (Ba1 rating under review), the nation's third-largest city. The state is comparatively economically diverse and wealthy, with personal income per capita equal to 105.1% of the nation's.

Methodology

The principal methodology used in these ratings was US States Rating Methodology published in April 2013. The additional methodology used in the state's appropriation bonds was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edward Hampton
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marcia Van Wagner
Additional Contact
State Ratings
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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