Moody's downgrades Illinois' credit rating

By Jamey Dunn

Recent efforts to close the state's budget gap, including a temporary income tax increase, were not enough to save Illinois from a credit rating downgrade.

Moody’s Investor Services lowered Illinois’ bond rating today. (You must login to see all rating agencies' reports.) The downgrade was from an “A1” rating to an “A2” rating and made Illinois the agency’s lowest rated state. “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. It remains to be seen whether the state has the political willingness to impose durable policies leading to fiscal strength,” said the Moody’s report.

Fitch, another bond rating agency, affirmed Illinois' “A” rating yesterday. Standard and Poor’s also held its rating of the state flat at an “A+” in a report released today. Under the Fitch rating, Illinois is only second to California for the lowest rating in the country. Fitch gave the state a “stable” outlook but cited concerns similar to Moody’s: the growing pension liability, billions in unpaid bills and lack of a clear budget plan when the income tax increase is set to begin rolling back. Standard & Poor’s gave the state a “negative” outlook. “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,” the agency’s report said. Standard and Poor's analysts said if Illinois can begin to address the unfunded pension liability and balance the budget, the outlook may change to “stable,” but there is little chance the state would see a ratings upgrade in the next year.

The ratings came as a result of the state planning a sale of about $800 million in bonds for capital construction projects. All three rating agencies viewed the recent tax increase as a positive step toward stabilizing the budget. However, it was not enough in the eyes of Moody’s analysts to deter a downgrade. The lower rating does not come as a total surprise because Moody’s did slap the state with a “negative” outlook last year and pointed to the state’s backlog of unpaid bills as the cause. Moody’s report said Illinois could improve its credit rating by enacting “a credible, comprehensive long-term pension funding plan” and paying down the backlog. The agency also called for “a legal framework or plan to prevent renewed buildup of late bills.” However, the report said a phase out to the tax increase without a solid plan to keep the budget balanced could result in further downgrades.

Gov. Pat Quinn’s budget office said the downgrade emphasizes the need to focus on pension and Medicaid reform and balancing the budget. “We are encouraged both Fitch and Standard & Poor’s affirmed the state’s long term bond rating. These actions indicate the state has taken positive steps to address its decades old budget challenges by reducing spending and enacting Medicaid, pension, worker’s compensation and education reforms,” said a prepared statement from the budget office. “The downgrade by Moody’s underscores that although the state has taken positive steps toward fiscal stability, as Standard & Poor’s and Fitch indicate by holding our rating steady, swift bipartisan action to implement further cost reductions and reforms in the upcoming legislative session are needed to stabilize the budget.”

As part of a three-year budget projection, Quinn proposed approximately 9 percent cuts to all areas of state government besides education and health care for fiscal year 2013. “We’re going to have to tighten the belt again this year,” Quinn told reporters in Chicago today.

Republican legislative leaders said the downgrade marks the need for substantial reforms. “Today’s downgrade in our bond rating is obviously very bad news for our state, and it proves that the General Assembly and the governor must do some very substantive things this spring that show we are committed to fundamentally changing the way we structure our budget now and going forward. Enacting major pension reform and Medicaid reforms must be at the top of the list. Obviously the practice of nibbling around the edges on reform and other budget strategies has not convinced these bond rating agencies that we are on the road to recovery. We must be bold and deliberate this spring," House Minority Leader Tom Cross and Senate Minority Leader Christine Radogno said in a joint statement. 

Although Quinn's projection showed a deficit of more than $800 million in FY 2015, the year the tax increase begins to phase out, the governor said it was to soon to focus on the issue. “I don’t think there’s a lot of need right now to be talking about that. I think we have to take one year at a time. Our goal this year in 2012 is to grow the economy, create more, have more exports help businesses expand and grow. … Robust economic growth is the key to getting a better budget.”

Quinn has also renewed his call for borrowing to pay down the state’s backlog of unpaid bills, which totals about $7 billion, according to his budget office. The governor’s repeated calls to refinance the debt by borrowing to pay it off now and then paying back borrowed funds over time at a lower interest rate have for the most part fallen on deaf ears in the legislature. Republican U.S. Sen. Mark Kirk weighed in today against Quinn’s borrowing proposal. “Moody's' decision to downgrade Illinois debt echoes the judgment of my Sovereign Debt Advisory Board report last year. Governor Quinn is planning to borrow $800 million more in the near future, with higher and higher interest costs paid by Illinois taxpayers. We are reaping the results of years of irresponsible spending and debt,” Kirk said in a prepared statement.