Is the already in the tank credit rating for IL about to be lowered further by Moody’s?

August 16, 2011

On August 5, Standard and Poor’s downgraded the U.S. credit rating from a sterling AAA to an AA+.

States were assured a few days later that the nation’s credit problems would not likely lower state credit ratings, yet Moody’s Financial Services issued a warning to Illinois on Wednesday, August 10 that the state could face a possible downgrade.

This warning came about for Illinois after Moody’s Investment Service implemented a major change in the way it would calculate state’s credit ratings.  According to the News & Blog report by the Illinois Policy Institute dated August 11, “Moody’s will now factor in a state’s unfunded pension liability, along with the traditional net tax-supported debt, when determining a state’s credit rating.”

This new rating change by Moody will reveal a significantly higher debt burden for Illinois than is commonly accepted by Illinois lawmakers, taxpayers and service recipients.

According to Moody’s, “The Illinois fiscal 2012 budget doesn’t address the state’s sizable backlog of unpaid bills and an unsustainable ascent in spending for pension benefits.”  Moody’s report also suggested that tax increases were only a short-term solution, leaving the state with a significant funding burden to meet its unfunded pension liability of about $80 billion, with the likelihood that late payments to vendors would continue.

The Illinois Policy Institute has calculated that Illinois has an unfunded pension liability nearly five times higher than in neighboring states and over three times as high as the national average of 3.27 percent, amounting to 9.90% percent of its GDP in 2009.

The state of Illinois has a right to be concerned.  A credit rating is an opinion about the ability of a debtor to meet its financial obligations (Standard and Poor and Moody’s Financial Services, the two largest companies along with Fitch, use rating systems which are comparable.). Standard and Poor’s long-term debt ratings range from AAA to D.  Ratings from AA to CCC may be modified by the addition of a plus or a minus sign.

Maryland, South Carolina, New Mexico, Tennessee and Virginia remain under review by Moody’s for possible downgrading, but Illinois, because of the magnitude of is debt obligation, remains more vulnerable.

Just how does Illinois rank in state credit ratings?

Thirteen states have the highest possible rating of Aaa: Alaska, Delaware, Georgia, Maryland, Missouri, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah, Vermont, and Virginia.

Ten other states, plus the District of Columbia, have the Aa2 rating: Connecticut, Louisiana, Maine, Michigan, Mississippi, Nevada, New York, Oklahoma, Rhode Island and Wisconsin.

It is not surprising that the state with the lowest rating is Illinois, which has a rating of A1 with a negative outlook. California also has a rating of A1, but with a stable outlook. New Jersey is third-worst state with a Aa3 rating.

Should Moody’s further downgrade Illinois’s credit rating, the Illinois Policy predicts that “Illinois tax-payers would have to pay higher interest rates for all state debts, including bonds issued, which ultimately would mean higher interest.  In the end taxpayers would be forced to contend with reduced services, such as inadequate road maintenance or reductions in aid to the poor) due to the crowding-out of services created by higher interest rates.”

This is not a pretty picture faced by Illinoisans, but in a state where one party rules, the responsibility to tackle the existing acute economic situation rests with the legislators and party leaders who have created the financial mess through their propensity to spend like there were no tomorrows.

The status quo can’t continue.  Failed legislative policies have created the financial Armageddon facing Illinois, but can they be trusted to do what it would take to fix it?

Might it be possible for Illinois voters to finally wake up in the 2012 election cycle to elect those who believe in less spending and smaller government, thus setting the stage for a gradual recovery in a state with great potential, and given sound economic policies, to rise to the top of the pack, instead of its current position of bringing up the rear?  I remain hopeful but doubtful at the same time.

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