CHICAGO - Standard & Poor's Corp. downgraded Illinois's general obligation rating to AA-minus from AA on Friday, citing the state's "continued weak financial operations and liquidity position."
The downgrade affects $4.2 billion of the state's GO debt, nearly $134 million of state agency debt, and $302 million of state university debt.
However, Standard & Poor's assigned its highest short-term rating, SP-1 plus to $600 million of GO certificates Illinois is scheduled to competitively sell on Thursday. The state is also scheduled to competitively sell $250 million of new and refunded long-term GO bonds on Aug. 18.
Standard & Poor's attributed the downgrade to the state's budgetary imbalance, which resulted in a record rollover of $1 billion of fiscal 1992 bills into the current fiscal year. Under a practice called lapse period spending, the state may use revenues from the first three months of a new fiscal year to pay expenses incurred in the previous fiscal year.
"That indicates some stress," said Todd Whitestone, a managing director at the agency.
He added that the agency was also concerned about the state's negative $1.5 billions unreserved fund balance, as reported on a generally accepted accounting principles basis, at the end of fiscal 1991, saying the agency expects that number to grow.
Mr. Whitestone said that while the state tried to improve its financial position with its fiscal 1993 budget, not enough improvement was made to justify an AA rating.
"Unless [the state] makes deeper cuts than it's done or considers some revenue enhancements, it's not going to bring balance back very quickly," he said.
He added that while "a substantial improvement" in the economy could help the state balance its finances, that economic improvement "does not seem to be on the horizon."
The $14.5 billion general funds budget passed by the legislature and signed by Gov. Jim Edgar last month contains a number of one-time revenue measures and higher revenue estimates to compensate for the legislature's rejection of several of the governor's revenue raising proposals.
The budget calls of the state to end the fiscal year on June 30 with a general funds cash balance of $200 million - $69 million more than the balance at the end of fiscal 1992, but $200 million less than the balance the state officials had projected last year for fiscal 1993.
In a release, Standard & Poor's said that while Illinois's "longer term financial plan" anticipates improving the state's financial position over the next several fiscal years, that improvement "is subject to budget deliberations and economic performance." The agency revised the state's rating outlook to stable from negative.
In statement released Friday, Gov. Edgar appeared to take the downgrade well, saying the rating agency's faith in the state's credit quality was reflected in its keeping Illinois in the "double-A category." The only disappointment mentioned by the governor was that the agency "did not publicly acknowledge that the General Assembly and I made tough decisions needed to cope with the recession and to further downsize state government, while maintaining essential services."
George Hovanec, the state's deputy budget director, said the state made less progress than it anticipated last fiscal year due to the recession, which caused revenues to fall and costs for social programs to climb. He also said the legislature failed to support raising revenues in the face of the November election.
"The governor is still extremely committed to improving the cash position and financial health of the state," he added.
Cash-flow pressures caused by the backlog of $1 billion of bills forced the state to turn to short-term borrowing for the second year in a row. While Gov. Edgar originally proposed borrowing $90 million to pay bills, opposition to part of the borrowing by state Treasurer Patrick Quinn pared that amount to $600 million.
The proceeds from Thursday's short-term debt issue will be used to pay bills owed to hospitals and nursing homes that provide Medicaid services. In addition to the state's GO pledge, the certificates are backed by assessments and fees charged to Medicaid providers and by federal matching Medicaid funds. Half of the certificates will mature on March 15 and the other half on May 15, according to the preliminary official statement.
The downgrade of the state's rating is the second by Standard & Poor's in just over a year. On Aug. 2, 1991, the agency dropped the state's rating to AA from AA-plus. A little over a month later, Moody's Investors Service lowered the state's GO rating to Aa1 from Aaa, a rating the state had held with that agency since 1944.
Steve Hochman, a vice president and assistant director of state ratings at Moody's, said Friday the agency would probably come out tomorrow with a rating for the short-term certificate issue and possibly for the long-term bond issue.
The Standard & Poor's action on the state's rating also resulted in downgrades for $133.9 million of debt issued by the Metropolitan Exposition and Auditorium Authority, Southwestern Illinois Development Authority, and Illinois Rural Bond Bank, and debt supported by statelease payments. In addition, the agency downgraded the various ratings for $302 million of unenhanced debt issued by the University of Illinois, Illinois State University, Chicago State University, and the universities of Southern, Western, and Eastern Illinois.