January 10, 2012           

There was little good news as three major rating agencies issued reports on Illinois credit worthiness the first week of January, 2012.

First up was the Fitch Ratings agency, which on Jan. 5, kept Illinois as the second-worst rated state in the nation, just ahead of California, and said they did not see any likelihood that the rating would improve any time soon.

That was as good as it got.

The next day, the two other major rating agencies, Standard & Poor's and Moody's Investors Services, issued their reports.

Moody's news was bad. The agency dropped Illinois' credit by a notch, giving it the lowest rating of any state.

Finally, Standard & Poor's issued their credit rating, saying that while they would not lower Illinois' credit ranking at this time; they were giving it a "negative outlook." That's an indication that a rating downgrade could come in the future.
 
But, what do these credit ratings mean?

One obvious answer is that, just like consumers, the cost for the state to borrow money goes up as the credit rating goes down. But, that's only part of the story. The ratings are a way for financial analysts to "take the temperature" of a state and look at it's financial health.

When Illinois sold capitol construction bonds Jan. 11, near record-low interest rates, good timing and luck gave the state a lower than expected rate. But that didn't mean that all the concern about the state's bottom-ranked credit was misplaced.  Just like consumer loans, there are a lot of other market factors that can affect interest rates. In addition, the rate likely would have been even better if Illinois had a better credit rating. It would be shortsighted to look at a single sale and assume that because the state received a good interest rate, there is no need to worry about the massive debt hanging over its head.

There is also good reason to believe that Illinois may face higher costs over the long haul if it doesn't improve it's credit rating. In a Jan. 10 column, St. Louis Post-Dispatch financial writer David Nicklaus had estimated that Illinois' poor credit rating could force the state to pay about 1.3% more than Missouri, which is rated triple-A, and about a half a percentage more than California, which shared the same rating as Illinois before the recent downgrade. Bloomberg News has estimated "Illinois faces borrowing costs more than quadruple its 10-year average."

Beyond the borrowing costs, the analyses that accompany the ratings offer an insight into how these objective financial analysts view Illinois' financial management of state government. In Illinois' case there were strongly-worded narratives provided by the rating agencies.

    "...there is still no sustainable plan to resolve the mismatch between spending and revenues. Further, despite the significant increase in tax revenues, the fiscal 2012 budget is not balanced." – Fitch Ratings

    "If Illinois does not make meaningful changes to further align revenue and spending and address its accumulated deficit (accounts payable and general fund liabilities) for fiscal years 2012 and 2013, we could lower the rating this year." – Standard & Poor's

    "The downgrade of the state's long-term debt follows a legislative session in which the state took no steps to implement lasting solutions to its severe pension under-funding or to its chronic bill payment delays...It remains to be seen whether the state has the political willingness to impose durable policies leading to fiscal strength..." – Moody's Investors Services

While some may argue that Illinois' poor credit rating is influenced by the national economy, that doesn't explain why the state fares so much worse than others. Out of all 50 states, Moody's Investor Services ranks Illinois at the bottom of the nation, while Standard & Poor's and Fitch ratings puts Illinois in next-to-last place, just above California.

Even that doesn't tell the whole story. Over the past three years, despite the ongoing recession, Moody's has downgraded only nine states. Forty states have rates unchanged from three years ago and one state has actually been upgraded. Of those nine that have been downgraded, six have received only one downgrade. California and Nevada were downgraded twice.

But Illinois has received four downgrades in three years; the most of any state in the nation. If the national economy was to blame, Illinois would have plenty of company in the cellar.

So, can the fiscal mismanagement be blamed on a mess inherited from former Governor and convicted felon, Rod Blagojevich?

Not quite.

It's true that during Rod Blagojevich's six years in office, Illinois received three credit downgrades. It's also true that in the 24 years before Rod Blagojevich took office, Illinois received a total of only six credit downgrades.

But, under Pat Quinn, Illinois has seen its credit rating downgraded nine times in just 36 months. The state has received as many downgrades in his three years in office as it received in the past 30 years. The Quinn administration has set a record in credit downgrades.

Reviewing the reports from the rating agencies makes it clear they are not pleased with the state's inability to get spending under control, despite the 67% tax hike passed with no Republican votes in January 2011.

In giving the state a "negative" outlook (which means a downgrade could be on the way), Standard & Poor's cited "the state's large accumulated deficit." For those who propose that the state could somehow borrow its way out of debt, they warned that a downgrade could be triggered if "debt levels increase significantly."

Fitch Ratings also warned of a possible downgrade if there is "excessive use of non-recurring revenues or additional payment deferrals in the budget." They also warned that if Illinois fails to control spending and find long-term solutions before the expiration of the temporary tax hike the state could see its credit downgraded.

All three rating agencies cited the state's massive pension debt as one of their most serious concerns and Moody's warned that they may take the state's credit rating down even further if the state fails to make its legally required contributions to the pension fund.

Governor Quinn's budget office has outlined an austere budget plan that promises to hold steady or cut virtually every area of state government, including the state's massive Medicaid program.

The projections disclosed a $500 million new deficit in this year’s budget. The Governor's outline for next year’s budget contained no details on how he plans to achieve his goal of cutting operating expenses next year by $170 million and holding spending level for three years.

Even assuming he manages to cut spending as he projects, the Governor's office still projects a new $800 million deficit by fiscal year 2015, when the tax hike is set to expire.  In short, as the independent assessments from the rating agencies make clear, Illinois’ fiscal house is in disarray with no clear plans to set it straight.