Illinois' nearly two year budget impasse continues to plague all municipal bonds linked to the state's credit. The state's budget deficit is expected to reach a staggering $6 billion by the end of June, with the severity of the situation increasing after a federal judge recently ordered the state to negotiate a plan to pay down approximately $2 billion of Medicaid debt owed to healthcare companies. The combination of its over $130 billion in underfunded pensions that are nevertheless protected from being "diminished or impaired" under the state's constitution and a $15 billion backlog in paying its bills has led to the state recently being downgraded to BBB- and Baa3 by S&P and Moody's, making Illinois the lowest rated US state in history and putting it one downgrade away from below investment grade.

In addition, lawmakers' failure to agree on a budget by the May 31 deadline triggered the requirement for a three-fifths majority to pass the budget instead of the standard simple majority vote. Rating agencies have also made it clear that another rating action is possible if a budget that addresses the state's deficits is not passed by the beginning of July. Given the severity of the situation, Illinois Gov. Rauner called the state legislature back from recess for a special session starting on June 21 with the goal of finalizing a budget within 10 days.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.