CHICAGO — Illinois is “almost guaranteed” a credit rating downgrade to junk if its voters next month reject a constitutional amendment allowing the state to tax high-income residents more, a Citi research report said on Monday.
However, Citi argued against non-investment-grade ratings for any U.S. state given the greater flexibility of states to weather fiscal crises than most U.S. corporations.
Illinois is the lowest-rated state at a notch above junk, with negative outlooks from all three major credit rating agencies.
Moody’s Investors Service and S&P Global Ratings recently issued warnings about Illinois’ struggle with a huge unfunded pension liability and structural budget deficit that has been exacerbated by the fallout from the coronavirus pandemic.
“If Moody’s downgrades Illinois (general obligation bonds) to speculative grade, we expect other rating agencies to follow suit,” the Citi report said. “The first downgrade will likely cause spreads to widen by about 50 (basis points), while the following downgrades should not have any impact.”
The spread for 10-year Illinois bonds over Municipal Market Data’s benchmark triple-A yield scale has been widening, increasing from 213 basis points on Sept. 1 to 271 basis points as of Monday.
An Illinois downgrade is “essentially a toss up” if the progressive income tax-rate amendment, which aims to raise more than $3 billion in additional revenue annually, passes on Nov. 3 as expected by Citi, but control of Congress is unchanged, the report said. Passage of the amendment and a Democratic sweep of Congress and the White House could give the state a reprieve on a downgrade, on expectations of more generous federal aid, it added.
The Citi report also said unlike corporations, states are monopoly service providers that have more flexibility to raise revenue and cut spending and cannot file for bankruptcy, underscoring its argument against junk ratings.