Illinois' recently passed budget relies on borrowing to meet some expenses. It's now going to cost the state more to borrow that money. Fitch Ratings dropped Illinois' credit rating by two notches Wednesday because the state did not address all of its spending needs and structural deficit in the just-passed budget.

Illinois' recently passed budget relies on borrowing to meet some expenses. It's now going to cost the state more to borrow that money.


Fitch Ratings dropped Illinois' credit rating by two notches Wednesday because the state did not address all of its spending needs and structural deficit in the just-passed budget.


The downgrade comes just after Moody's Investor Service said it is reviewing the state's credit rating and may also downgrade it for the same reasons. Like Fitch, Moody's expressed concern that Illinois didn't really resolve its budget problems with the just-passed budget and that it could create more financial stress in the future.


Fitch said it is dropping the state's bond rating on general obligation bonds from "AA-" to "A". The drop means the state will pay more when it borrows money, although the amount cannot be determined now.


"The downgrade reflects the significant scope of the budgetary problem and the failure of the state to enact a budget that fully addresses its current spending needs and its large structural deficit," a report issued by Fitch on Wednesday said. "The extent of the current fiscal problem has been clear for several months as revenue estimates were downsized; however comprehensive solutions have been repeatedly delayed."


The Fitch report said the state did not take "meaningful action" on the budget by declining to raise income taxes and leaving "significant" parts of state spending unfunded.


Instead, the report said the state fashioned a budget that "relies heavily on non-recurring revenues, particularly the use of debt to finance current operations..." That includes taking over $300 million out of restricted state funds and spending $600 million from refinancing other portions of the state's debt. The budget agreement also calls for the state to issue $3.5 billion in bonds to make the required payments to the state's pension systems.


All of those things will help the state pay bills without a tax hike in the current budget, but they won't be available to help for next year's budget and, the report said, "will contribute to continued difficulty in structuring a balanced budget in the future."


Fitch analyst Karen Krop said that while an "A" rating is "still a strong rating" it is among the lowest for a state rating on general obligation bonds.


Gov. Pat Quinn's office said it has not determined when it will try to sell the $3.5 billion in pension notes.


"We are disappointed in Fitch's action but believe Gov. Quinn is taking major steps toward stabilizing the state's financial situation," Quinn's office said in a written statement. "Gov. Quinn agrees that long-term structural changes are needed. He is working to accomplish that by backing pension reform, systemic cost cutting and greater operating efficiencies. In addition, Governor Quinn continues to fight for a much-needed revenue increase to pay the state's obligations in a timely manner..."


Doug Finke can be reached at (217) 788-1527 or doug.finke@sj-r.com.