Illinois Receives Nation’s Worst Credit Rating

Illinois Receives Nation’s Worst Credit Rating
January 9, 2012

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

Despite having imposed a record 67 percent increase in the personal income tax and 46 percent increase in the corporate tax in January 2011, Illinois state government’s debt situation continues to crumble.

Credit rating agency Moody’s Investor Service on January 6 downgraded Illinois government debt, from A1 to A2, giving Illinois the nation’s lowest credit rating.

Moody’s wrote: “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. Failure to address these challenges undermines near- to intermediate-term prospects for fiscal recovery.”

A second rating agency, Standard & Poor’s, warned of a future credit downgrade by giving Illinois a negative outlook.

A lower credit rating means state taxpayers can expect to pay higher interest rates on money state government borrows.

$32 Billion Owed

The state owes approximately $32 billion, up from $9.4 billion 10 years ago. The state also has a $7 billion backlog of unpaid bills, which Gov. Pat Quinn (D) has said he’d like to pay off with borrowed money. Quinn's budget office projects a deficit this fiscal year of $508 million and a deficit exceeding $818 million next fiscal year. These figures ignore the billions of dollars of unpaid bills.

Meanwhile, Quinn’s administration in early January announced the state’s fiscal situation is not improving despite the $7 billion annual tax increase Democrats last year imposed on citizens and businesses. Not a single Republican legislator voted for the tax increases.

Among other problems, Quinn projected the state’s obligation to government pension systems will grow by 43 percent by 2014, to about $5.9 billion. Medicaid costs also are spiraling.

‘Creates a Squeeze for Everything’

“Our revenue growth is not enough to keep up with pensions and Medicaid. It creates a squeeze for everything else,” Quinn’s budget director, David Vaught, told The Associated Press.

“Under the outline presented by the budget office, virtually all state spending must remain flat for the next three years,” said Senate Republican Leader Christine Radogno (R-Lemont). “In order to achieve a balanced budget there could be no increase in education, public safety, welfare and healthcare spending.

“That's a tall order, given that in just one area of state spending, Medicaid, current projections show that Illinois would need to spend about $3 billion more next year just to keep its current level of services and prevent the existing backlog of bills from growing.”

Though the nation’s third major credit rating agency – Fitch – gave the state a stable rating, leaving Illinois with the nation’s second-worst rating in its opinion, Fitch warned if the state uses one-time revenues to increase permanent spending, or pushes off payments to balance its budget, the state's credit could be downgraded.

The state last year pushed $2 billion of payments into this fiscal year.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)