By Karen Pierog
CHICAGO (Reuters) - Moody's Investors Service on Tuesday downgraded Illinois' general obligation bond rating to A2 from A1, citing the state's financial woes stemming from the U.S. recession.
Moody's cut other Illinois ratings, affecting about $24 billion of outstanding debt, including the state's Build Illinois sales tax revenue bonds, also cut to A2 from A1.
The downgrade gave Illinois the second lowest U.S. state rating from Moody's, with California having the lowest at Baa1, a Moody's spokesman said.
Moody's said Illinois has yet to take action to tackle a structural budget gap of more than $11 billion, equal to about 35 percent of its expenditures.
"The downgrades are the result of high structural imbalances and little time to effect modifications to the budget in the current fiscal year, which ends June 30, 2010, as well as evidence of significant weakening in the state's 2009 results," Moody's said in a statement.
With an 11 percent jobless rate in October, Illinois was among half a dozen U.S. states with double digit unemployment.
Other states, such as California and Michigan have also suffered debt rating downgrades this year as the recession and unemployment punched holes in their budgets.
Moody's revised the outlook for Illinois' GO and related ratings to negative, "reflecting the continuing likelihood of large structural budget deficits, growing negative year-end fund balances, strained operating fund liquidity and mounting pressure from pension and retiree health benefit obligations."
Moody's put the state on review for a potential downgrade shortly after Illinois enacted its fiscal 2010 budget in July.
Other rating agencies took action on Illinois' GO rating this summer. Standard & Poor's Ratings Services rates Illinois AA-minus with a negative outlook it gave the state in August. Fitch Ratings dropped Illinois' rating two notches to A in July, citing the state's "large structural budget deficit."
With Illinois facing a growing backlog of unpaid bills, Governor Pat Quinn has proposed a $500 million cash-flow borrowing, which would add to the $2.25 billion in outstanding short-term borrowing the state must pay off in June.
A spokesman for Quinn did not immediately respond to a request for comment on the downgrades.
Illinois has slated a nearly $155 million Build Illinois competitive sale for Thursday, followed by a $375 million negotiated sale through Cabrera Capital Markets next week.
Ahead of the $530 million sale of Build Illinois bonds, S&P affirmed an AAA rating, while Fitch affirmed an AA rating based on strong debt service coverage provided by the sales tax.
(Editing by Andrew Hay)