Illinois budget uncertainty extends into new fiscal year

By Dave McKinney and Karen Pierog

CHICAGO (Reuters) - A rare sign of bipartisanship in the Illinois House on Friday fueled hopes of movement toward a spending deal, but a consensus failed to emerge in time to stop the state from heading into a third-straight fiscal year without a budget.

The record stalemate between Republican Governor Bruce Rauner and Democrats who control the legislature has put the third-most populous U.S. state's credit rating in peril of dropping to junk.

House Republicans on Friday helped advance a Democratic-drafted $36.5 billion spending plan for the fiscal year that begins on Saturday, but the deal stalled with negotiations continuing over a revenue package and an assortment of non-budgetary matters sought by Rauner.

After a 90-25 test vote on the spending bill, House Speaker Michael Madigan said his legislative chamber will return to session on Saturday, and he sent letters to major bond-rating agencies imploring them not to downgrade the state’s credit ratings to junk as budget talks continue.

The impasse has ballooned the unpaid bill pile to nearly $15 billion as the state operated on spending mandated by state law and courts. Illinois, already the lowest-rated state, risked becoming the first U.S. state to have its credit downgraded to junk.

Ted Hampton, an analyst at Moody's Investors Service, which rates Illinois one notch above junk at Baa3 with a negative outlook, said the rating agency "won't refrain from changing a rating no matter the reason when it's appropriate to take action."

S&P, which also rates Illinois one step above junk at BBB-minus, and Fitch Ratings, which has the state at BBB, declined to comment on Madigan's letter.

Ahead of the House vote, Republican leader Jim Durkin said he and others in his caucus would support the budget bill amendment as a gesture of “good faith” while talks continue on new taxes and non-budgetary reforms.

"We are close," he said on the House floor. "We are so close I can taste it.”

House budget votes require Republican support to meet a three-fifths majority needed for passage.

“I think it’s a good step forward, a step we can build upon. There’s much work yet to be done," Madigan said following the vote.

A final affirmative vote by the House on the spending plan would send it back to the Senate for concurrence. The House must still take up a revenue bill increasing personal and corporate income tax rates to raise more money for the cash-strapped state.

(Editing by Matthew Lewis)