CHICAGO -- Standard & Poor's Corp. downgraded $4.2 billion of Illinois general obligation debt to AA from AA-plus Friday, citing "significantly weakened financial operations and position during the past two fiscal years."

"We don't believe Illinois is where it was a couple of years ago," said Todd Whitestone, a managing director at the agency. "Illinois has some work to do to get back to where they were."

The two-year decline saw the state's unreserved fund balance, as reported on a generally accepted accounting principles basis, grow to an estimated negative $1.2 billion in fiscal 1991, from a negative $256 million in fiscal 1989, according to the agency.

In addition, the rating agency said that state's yearend cash balance had decreased to $100 million in fiscal 1991, from $541 million in fiscal 1989, and that the latest balance was only achieved by delaying hundred of million dollars of fiscal 1991 payments until the current fiscal year through so-called lapse period spending.

Even though the state anticipates ending its current fiscal year on June 30, 1992, with a $200 million balance, he said, that level did not give the state enough flexibility to maintain an AA-plus rating.

Mr. Whitestone added, however, that the state's intention to increase its cash balance to $400 million by the end of fiscal 1993 would be "a substantial step in the right direction."

Other variously rated state-agency debt totaling $110.1 million also was downgraded.

Bond traders said they expected the downgrade announcement, adding that Illinois GOs had been trading at the AA level for some time. They also pointed out that trading of Illinois issues in the secondary market was thin.

Moody's Investors Service still rates the state's GO debt Aaa. George Leung, vice president and managing director for state ratings at Moody's, said the rating agency is still reviewing the Illinois budget but that a meeting would be held with Illinois officials a short time before the state's next bond sale.

William Ledbetter, chief of the economic development division in the Bureau of the Budget, said the state intends to go to market in September with an approximately $150 million GO college-saver bond offering.

State officials tried to put a positive spin on Standard & Poor's ratings announcement by pointing out Gov. Jim Edgar had only been in office since January and blaming the financial practices of the past administration and the recession for the ratings change.

"There were two things out of our control," said Joan Walters, the state's budget director. "The practices of the past weakened our financial position and...the economic downturn in the third and fourth quarters increased our lapse-period spending."

Ms. Walters also pointed out that Standard & Poor's had assigned a stable long-term outlook to the state's debt. "That means that in the foreseeable future [the rating agency] won't take action on Illinois, which is a big plus," she stated.

In a written announcement on the action, the rating agency said the $27.5 billion all-funds fiscal 1992 state budget approved last month by the Illinois General Assembly did not go far enough to maintain the state's AA-plus rating.

"While the final 1992 budget does provide a framework for the state to improve its financial position, the magnitude of the anticipated improvement is not sufficient to warrant a maintenance of the AA-plus GO debt rating," the agency announced.

The $27.5 billion all-funds budget passed 19 days into fiscal 1992 by the General Assembly was balanced by using about $15 million of onetime revenues and savings. The one-shots package is composed of $182 million of fund transfers, $172 million gained by delaying a school aid payment until fiscal 1993, $111 million in accelerated sales and gasoline tax collections, and $50 million in savings from an employee early-retirement program.

The state also will receive $157 million this fiscal year from a temporary 10% increase in the state income tax. The state's share of that tax will drop to $99 million in fiscal 1993.

The rating agency also wrote that the state's weak fiscal condition increased the possibility of short-term cash-flow borrowing this fiscal year. State Comptroller Dawn Clark Netsch reaffirmed Friday that the state should do about $300 million of short-term borrowing for cash flow purposes.

"The truth is that we are already borrowing money, but we are borrowing it from the people who provide state services," she said. "We should do our borrowing up front and pay our bills in a timely manner."

The current state budget calls for lapse-period spending of $827 million to pay fiscal 1991 bills during the first three months of fiscal 1992.

Ms. Walters said the state was currently assessing the necessity for cash-flow borrowing and that no determination has been made.

Standard & Poor's on Feb. 11 placed about $7 billion of state-related debt on CreditWatch with negative implications, citing a shrinking general funds cash balance and a growing unreserved general funds balance as measured on a generally accepted accounting principles basis.

State agency ratings downgraded and removed from CreditWatch and the amount of debt outstanding are:

* Certificate of participation Series 1988, to A-plus from AA-minus, $12.4 million.

* Collinsville state leased facilities Series 1986 and 1987, to A-plus from AA-minus, $17.3 million.

* Metropolitan Exposition and Auditorium Authority Series 1985, 1986 and 1990A, to AA-minus from AA, $27.9 million.

* Southwestern Illinois Development Authority, to A from A-plus, $45/7 million.

* Illinois Rural Bond Bank, to A from A-plus, $6.8 million.

Standard & Poor's affirmed the ratings on $347.5 million of Illinois Public University bonds and removed the issues from CreditWatch.

However, about $1.1 billion of variously rates debt that carries the state's moral obligation pledge and was issued by the Illinois Housing Development Authority remain on CreditWatch. Dana Bunting, a vice president at the agency, said the debt was under review to determine whether the issues could support themselves without the state's pledge. She added that the review should be completed by the end of this month.

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