(Bloomberg) — Illinois leaders are hours away from blowing a deadline that will leave the state careening toward the third straight year without a budget.
If the gridlock-prone legislature can't pass a spending plan by midnight — a routine governing task that has eluded it for 700 days — doing so becomes even more difficult because a three-fifths majority will be required. Democratic lawmakers, who control both chambers, and Republican Gov. Bruce Rauner have repeatedly failed to agree on how to solve chronic budget deficits worsened by the expiration of tax hikes in January 2015.
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"We are probably approaching that point of impaired ability to function at basic level," said John Humphrey, the Chicago-based head of credit research for Gurtin Municipal Bond Management, which oversees about $10.1 billion of state and local debt and has steered clear of Illinois. "We've already probably passed that point. We haven't seen this in a modern state before."
The self-inflicted crisis has left the fifth most-populous state with a record $14.5 billion of unpaid bills, ravaged entities like universities and social service providers that rely on state aid and undermined Illinois's standing in the bond market. Without a deal by midnight, it's increasingly likely that Illinois enters its third fiscal year on July 1 without a budget.
Bond-rating companies have warned of further ratings cuts, signaling that Illinois could be the first state since at least 1970 to lose investment-grade status.
Investors have long punished the state for its financial woes, and the penalty has only gotten worse amid the impasse. Its 10-year bonds yield 4.4%, 2.4 percentage points more than those on top-rated debt. That gap — a measure of the perceived risk — is the most since at least January 2013 and more than any of the other 19 states tracked by Bloomberg.
Rauner, who in 2015 became the first Republican to lead the state since 2003, wants any spending plan to be tied to his key priorities, such as property tax-freeze. The Senate on Tuesday approved measures that would lock most local real estate levies in place for two years, but Republicans said they didn't go far enough.
In the meantime, Illinois is spending more than it's taking in because of consent decrees, court orders and other appropriations that have kept the government from shutting down despite the lack of a budget. Its current-year operating deficit is about $6 billion, Moody's Investors Service said in a March report.
Moody's and S&P Global Ratings have warned that Illinois could be downgraded deeper if no budget is enacted. The companies rank the state at Baa2 and BBB, respectively. That's two levels above junk.
