CHICAGO, Aug 22 (Reuters) - The sale of up to $6 billion of bonds by Illinois to shrink its enormous unpaid bill backlog, an action the governor has yet to take, could protect the state from a credit rating downgrade to junk, S&P Global Ratings said on Tuesday.
The credit rating agency said the issuance of 12-year general obligation bonds would be cheaper than late payment penalties of as high as 12 percent that the nation’s fifth-largest state owes on much of its $14.8 billion backlog of bills.
“Therefore, the state may realize net fiscal savings which we believe Illinois can ill-afford to pass up given its weakened financial position, even if the additional debt service adds incrementally to its operating deficit,” S&P said in a statement.
Illinois bonds due in 12 years were yielding 3.91 percent, according to Municipal Market Data, a unit of Thomson Reuters. Since the Democratic-controlled legislature enacted a fiscal 2018 budget and income tax hike in July over Republican Governor Bruce Rauner’s vetoes, the state’s so-called credit spread over MMD’s benchmark triple-A yield scale for 10-year bonds narrowed to 178 basis points from a high of 335 basis points in June.
While the budget authorized a bond sale by Dec. 31 to pay bills, Rauner has been reluctant to take that step. Illinois Comptroller Susana Mendoza, a Democrat who is in charge of paying the state’s bills, has been pushing for the bonds as late-payment penalties grow by $2 million a day.
“We’re glad to see our argument vindicated by S&P,” said Abdon Pallasch, her spokesman.
There was no immediate comment on the S&P report from Rauner’s office.
The budget’s enactment, following an unprecedented two fiscal years in which the state lacked a complete spending plan, spared Illinois from becoming the first U.S. state to be rated junk.
S&P said implementing the bond plan would likely not improve Illinois’ BBB-minus rating, which is a step above junk.
“However, refinancing a portion of the state’s high-interest bill backlog could offer a modest layer of potential cushion to its liquidity,” the statement said. (Reporting by Karen Pierog; Editing by Matthew Lewis)