Stalemate putting bonds in ‘junk’ territory

Congratulations, everybody! Illinois now has five

public universities with junk bond credit ratings. That has to be some kind of


Last week, S&P Global Ratings lowered the credit score

of both Southern Illinois University and Western Illinois University into junk

bond status. Eastern, Northeastern and Governor’s State were already in junk

bond territory and their ratings were lowered even further last week. The

University of Illinois, the state’s flagship, was also downgraded to just three

notches above junk status and, like all the other universities, put on a

“credit watch with negative implications,” meaning it could be

downgraded again within the next 90 days.

All of the downgrade reports noted that none of the

universities have received any funds since their partial “stopgap”

appropriation in June of last year. The reports also seemed to advocate for

another stopgap funding bill this fiscal year.

For instance, while noting in the U of I’s report that a

stopgap had been passed last year to cover the first six months of this fiscal

year, S&P went on to write: “the state has yet to pass a budget for

fiscal 2017 and has not conclusively communicated plans for stop-gap funding to

support the state’s public higher education institutions.”

As you may know, Gov. Bruce Rauner and his legislative

Republicans are adamantly opposed to another temporary stopgap budget that

would use existing special state funds that are currently piling up in bank

accounts to help out struggling universities, college students and human

service providers and recipients.

Their argument is that distributing the money would take the

pressure off everyone to pass a real budget with the governor’s demanded

reforms. At the same time, Rauner and GOP legislators want to take state

employees out of the “pressure” equation with a continuing

appropriation, which means those salaries would essentially be funded

throughout eternity. But since the lack of funding for social services and

higher education over the past two years hasn’t spurred anyone in Springfield

to action, it might be that only an actual government shutdown after state

employees can’t come to work will actually move the needle.

“If state operating appropriations are received in

fiscal 2017,” S&P declared in its SIU downgrade report, “we will

incorporate the impact of those appropriations at that time,” suggesting

that some money thrown at the universities via a stopgap plan could forestall

another immediate ratings downgrade.

Junk status means many investment institutions, like pension

funds, cannot buy those bonds. So, while the state hobbles the universities by

refusing to make full appropriations, it’s also undermining their ability to

borrow at semi-reasonable rates. Speculators looking for relatively high

returns on bonds that have to be repaid will gladly buy those bonds and rake in

the dough. Meanwhile, precious dollars that the universities cannot afford to

spend have to be used to make higher interest payments. It’s a horrific fiscal

cycle and, in our case, it’s completely man-made.

It could take our universities a decade or more to recover

from these body blows. At the very least, we need a stopgap budget now and then

a full, “real” budget before the beginning of next fiscal year.

The governor is currently running all over the state

proclaiming to anyone who will listen that a deal is “very close.” He

said at an Elk Grove Village event last week that “a big comprehensive

package” was being prepared. Democrats say they have no idea what he’s talking


Rauner had better be right because, even though the

Democratic Party has its own dirty hands here, the governor is the state’s

chief executive, so he will wear the jacket for failure. He’s come up with

excuse after excuse for more than two years now for why he can’t get a budget

passed, or even why he won’t propose his own balanced budget. No more.

And if you dig a little deeper at those S&P reports,

you’ll see that the ratings agency had some very specific warnings for state

government as well.

Illinois’ credit rating is just barely above junk status.

And S&P warned in several of its downgrades that the universities could be

in for a “multinotch downgrade” if the state’s rating is lowered. Another

downgrade report warned that there was “at least a one-in-two likelihood of a

rating change within the next 90 days,” more than implying that action against

the state’s credit rating could happen soon.

Rich Miller also publishes

Capitol Fax, a daily political newsletter, and

Rich Miller’s column

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