Dow Jones Newswires | Moody’s lowered Illinois’s general
obligation bond rating, after the state’s legislature failed to enact
significant recurring measures to address the state’s structural budget
imbalance for the fiscal year starting next month.

The ratings agency lowered the rating by one notch to A1, which is four
notches below AAA, and revised the outlook to stable, due to the state’s
strong powers to control revenue and expenditures.

But Moody’s warned significant risks to the rating remain, given the state’s likely reliance on interyear cash-flow debt, delays of payments other than debt service and various nonrecurring resources, some of which are uncertain.

Ratings agencies have taken issue with the state’s failure to enact substantial recurring budget-balancing measures, which has been a problem in recent years. The longer the solutions to the state’s challenges are deferred, the more difficult they will be to implement, Moody’s said Friday.

“We view the failure to enact significant new recurring fiscal measures as a troublesome indicator with respect to Illinois’ governance and management profile,” wrote Moody’s.

This year, the state enacted pension reforms that will curb benefits for incoming employees. The law raises the minimum retirement age needed for maximum benefits to 67, from as low as 55, and curbs some benefits for incoming employees, as well as other reform efforts. In addition, the state enacted revenue increases — primarily related to video gambling, motor vehicle-related fees and taxes on alcoholic beverages and other products. Those measures are projected to generate savings of  $700 million to $800 million annually, a small sum compared with the state’s structural imbalance.

Moody’s also warned the state is expected to have a weaker economic recovery than the nation, indicating that growth alone won’t generate enough revenue to balance the state’s financial operations. Economic performance, meanwhile, has lagged the nation for all of the current decade, in periods of growth and contraction. Still, the state remains a commercial and financial hub, with an economy more diversified than those of other industrial Midwest states.

Illinois’s problems are an exaggerated version of dynamics playing out across the U.S. All states, except Vermont, have at least a limited requirement to balance their budgets. In practice, many states rely on one-time revenue windfalls or short-term borrowing to scrape from one fiscal year to the next. The recession has sharply reduced income-tax and sales-tax revenue, and lawmakers often don’t want to anger voters by raising taxes in an election year.

Fitch Ratings in April revised the state’s rating to A+, the same as Moody’s new grade, amid a recalibration of the agency’s U.S. public finance ratings. Standard & Poor’s Ratings Services, meanwhile, said it would mull a downgrade in March. It also rates Illinois at A+.