MuniLand – Trouble on the Third Coast: Illinois, City of Chicago and Chicago Public Schools

A lot has happened since we last discussed Illinois and Chicagoland credits. First, the Illinois State Supreme Court ruled that reforms to state employee pension plans were unconstitutional. Illinois was expecting significant cost savings from the reforms to balance their fiscal year 2016 budget. Now three weeks into the 2016 fiscal year, the state has yet to pass a budget, which could result in state workers going unpaid and IOU’s being sent out in lieu of payment to vendors and service providers. SNWAM grades the state credit quality poorly because it ranks at the bottom of all states on our debt and fiscal measures. The credit rating agencies give Illinois the lowest grade of any state, and the market is pricing 10yr debt around 4.1-4.3%, or 180-200 basis points over the AAA scale. This is more than 150 basis points above where higher rated states are trading and indicates the market is concerned with the State’s credit quality. The budget stalemate between Governor Rauner and legislative leaders hinges on the passage of significant changes to public employees’ collective bargaining rights, higher proof of employee injury claims and, most important to local credits, the proposed introduction of Chapter 9 bankruptcy legislation. The proposed Chapter 9 bankruptcy option creates a new level of uncertainty for local Illinois credits.  We have no exposure to the state of Illinois or any of the weak local credits, like the City of Chicago and the Chicago Public School District, that have been and will continue to be affected by weak balance sheets.  The rating agencies, particularly Moody’s, have taken swift ratings actions by downgrading these entities to junk status.  Unless legal reform is granted, look for the problems in Illinois to continue. 

Source: Bloomberg, MSRB, IL State CAFR