published Jun 9th 2016, 4:10 pm, by Elizabeth Campbell

(Bloomberg) —
Illinois had its bond ratings dropped to levels not seen for a U.S. state in over a decade because of a protracted political deadlock that’s left it veering toward its second straight year without a budget.

Moody’s Investors Service cut its grade on about $28.8 billion of general-obligation and sales-tax debt by one level to Baa2, its lowest for a state since Massachusetts in 1992. S&P Global Ratings followed by dropping it one step to BBB+, one rank higher than Moody’s, and Fitch Ratings said it may cut its BBB+ rank. Moody’s and S&P have negative outlooks on Illinois, signaling more downgrades may follow if the standoff between Governor Bruce Rauner and the legislature isn’t resolved.

“It’s hard to be optimistic with the outlook right now because there’s no budget and no signs of any movement toward an agreement,” said Dan Solender, head of municipals in Jersey City, New Jersey for Lord Abbett & Co., which manages about $19 billion of the debt, including Illinois bonds.

Illinois is locked in an unprecedented stalemate because Rauner, a Republican who took office in January 2015, and the Democrat-led legislature have been unable to agree on how to close a shortfall that resulted when temporary tax-increases expired, leaving the state poised in July to begin its second year without a budget. That’s added to the state’s strains as stopgap measures to avert a shutdown keep the government spending more than it brings in.

S&P’s BBB+ rating on Illinois is its lowest for a state since California in 2004, which had a rank one step below. The credit company also lowered its rating on the state’s moral obligation bonds, which have weaker legal protections, to BB+, one level below investment grade.

“The duration of this mismanagement has undermined Illinois’ credit profile and impeded its ability to address its long-term liabilities,” John Sugden, an S&P analyst, said in a statement on Thursday.

The ratings cut may lead investors to demand higher yields when the state sells $550 million of bonds next week, its first sale since January. Illinois’s 10-year debt already yields about 3.4 percent, or 1.8 percentage points more than benchmark securities. That’s by far the highest among the 20 states tracked by Bloomberg.

Illinois’s taxable bonds due in 2033, the most actively traded securities Thursday, dropped to an average of 95.2 cents on the dollar from 95.6 cents Wednesday. That pushed the yield up to 5.55 percent from 5.51 percent.

BlackRock Inc., the world’s largest money manager, said Wednesday that the municipal market should consider denying the state market access because of its fiscal woes. Not only does Illinois not have a budget, it has the lowest funded ratio for its pensions of any state, said Peter Hayes, who oversees $119 billion as BlackRock’s head of munis. Illinois owes about $111 billion to its workers’ retirement plans.

Political Conflict

Rauner, a former private equity executive, has clashed with Democrats over his proposals to curb the power of unions, limit property taxes and overhaul workers-compensation laws, and he has drawn a line against tax increases unless some of his program is adopted. Democrats, led by House Speaker Michael Madigan, have rejected that.

Since the regular legislative session ended May 31, a three-fifths majority is needed to approve a budget, making the task that much more difficult. Rauner is now pushing for a six-month spending plan that doesn’t include his agenda items.

“When the General Assembly adjourned without passing a balanced budget, the administration warned the super majority in the legislature there would be consequences,” Catherine Kelly, a spokeswoman for Rauner, said in an e-mailed statement. “This report underscores the need for real structural changes to repair the years of unbalanced budgets and deficit spending by majority party on Illinois’ finances.”

Moody’s also lowered the rating on bonds whose payments need to be appropriated by the legislature, including $2.7 billion of debt issued by the Metropolitan Pier and Exposition Authority. Those securities were cut one step to Baa3, the lowest level of investment grade.

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What else can you expect from the home state of Barack Obama?–W.