June 26, 2017—The Illinois General Assembly continues its 10-day special session this week making a last-ditch effort to approve a state budget prior to the start of its fiscal year on July 1. Other states, including Delaware, New Jersey, and Pennsylvania are still hashing out their budgets, but the stakes for Illinois are much higher. 


After failing to pass a budget for an unprecedented two years, the state’s lack of funding support is creating severe financial stress at many of its public universities and social service agencies. Apart from this, however, court orders, consent decrees, and continuing appropriations have kept most state spending at levels of prior years, despite reduced revenue. Consequently, the state has built up a massive payables backlog. As of June 22, 2017, the state owed over $15 billion in payables, a threefold increase from just two years ago. Without a budget in place, this sharp rise in unpaid bills is expected to continue.


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Source: The Ledger



If the state enters its third fiscal year without a budget, one or more rating agencies are expected to further downgrade the state’s bond ratings. Current general obligation ratings by Moody’s, S&P, and Fitch are Baa3/BBB-/BBB, respectively. At rating levels below investment grade, the state’s access to capital becomes much more expensive. 


Illinois’ financial woes are long-standing and self-inflicted. Recent downgrades could have been avoided had the Republican governor and majority-Democratic legislature settled on a budget compromise. Illinois’ political brinkmanship has led the state to unchartered territory—on the cusp of losing its investment-grade rating—and it is unlikely to experience improvement in its finances and bond ratings until its politicians agree upon a structurally balanced budget. Favorably for bondholders, statutory protections are strong and debt service is prioritized.


No comparison with Puerto Rico


Puerto Rico has been in the headlines daily as a result of its deepening financial distress. Not so long ago, Puerto Rico’s general obligation ratings were similar to those held by Illinois. While it may be tempting to compare Puerto Rico and Illinois, there is little similarity between the two.


Although severe, Illinois’ financial problems are more readily addressable than those of Puerto Rico’s due to the state’s deep and broad economy. Although Illinois’s rebound from the recession lags that of its neighbors, the state has made progress, benefiting from the strength of the Chicago metro area economy. Strong tourism, a robust transportation/logistics sector, and around 200 academic and research institutions are key strengths of the area economy. Additionally, the Illinois workforce is well educated with approximately one-third of state residents holding at least a bachelor’s degree.


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 Source: CreditScope


Puerto Rico is experiencing sizable outmigration, particularly among its highly educated. Although Illinois has also suffered from outmigration during the past three years, the pace is significantly slower. Puerto Rico’s poverty rate is extremely high at over 45%, while that of Illinois is just 14.3%, below the national average of 15.5%. Puerto Rico’s per capita and median household income levels are just 37% and 34%, respectively, those of Illinois, as shown above. These stark economic and demographic differences between Illinois and Puerto Rico suggest very different outcomes for their debtholders.


 Core narrative

Both Illinois and Puerto Rico represent unique credit situations in the municipal sector, operating in highly uncommon terrain. As the evolving municipal market increases in complexity, Wilmington Trust Investment Advisor’s Municipal Fixed Income Team’s rigorous approach to fundamental credit analysis is designed to provide strong credit selection and critical oversight of municipal bond portfolios.



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