![]() To avoid financial calamity, Springfield politicians will need to adopt strategies that fundamentally break with Illinois’ status quo fiscal policy of chasing higher revenues. That means Illinois could be the first on both counts. The state was able to renegotiate payments on outstanding bonds with investors and put itself on a path back to financial health through the Highway Refunding Act, according to The Bond Buyer.Īrkansas never formally entered bankruptcy or received a junk rating, because the state’s initial credit rating from S&P was not until 1966. Shortly after the start of Great Depression and a series of natural disasters, Arkansas found itself in an impossible financial situation after taking on local road bonds and was unable to make interest payments, The New York Times reports. state has defaulted, or failed to make payments, on its bonds since Arkansas in 1933. Credit ratings are a signal to investors about a borrower’s ability to meet its financial obligations. Similarly, Moody’s has said Illinois’ rating reflects “extremely large net pension liabilities and a long history of unbalanced financial operations.” The only way for Illinois to reduce pension liabilities is with a constitutional amendment to the state’s pension clause or never-before-seen state bankruptcy, an option not currently authorized by the federal government.Ī drop to junk status would shock municipal bond markets nationwide, shaking investor confidence that state and local government debts are a secure investment. In 2019, S&P warned that without a “practical reduction in liabilities” of the state pension systems the state’s credit could slip to junk status. The state has been downgraded a total of 21 times since 2009. Illinois’ worst-in-the-nation credit has been built during two decades of the state spending more than it brings in, driven primarily by the pension crisis. Fiscally healthy Tennessee will spend just $327 million, or 0.8% of the state’s $40.8 billion budget, on debt service for the coming year. In fiscal year 2020, Illinois will spend almost $2.1 billion on payments for existing bonds or over 5% of the state budget. Lower credit ratings mean investors will demand higher interest payments to buy state debt, raising the cost of borrowing to taxpayers. ![]() ![]() Illinois was the least prepared to weather a recession heading into the coronavirus crisis, with only about 15 minutes of state spending saved in a rainy day fund. When investors demand higher interest it generally reflects a higher risk that borrowers will default. In fact, the state is actually paying higher interest on its debt today than it was in June 2017, according to Crain’s Chicago Business. According to the Bond Buyer, S&P analyst Geoffrey Buswick said the state now has a “one-in-three” chance of economic conditions deteriorating to a level that would cause its credit to drop to junk. The risk of dropping to junk status may be even higher than when the state had no formal budget for two years. Illinois’ credit rating and outlook from both Moody’s and S&P are now exactly the same as at the end of the state’s two-year budget impasse. A sharp economic downturn will cause revenues to come in billions below expectations at the same time spending automatically increases on pensions and Medicaid, potentially blowing a hole in the budget of $6.3 billion or more, depending on severity. The Prairie State has the lowest rating among states across all three agencies.Ī change in credit outlook is not the same as a credit downgrade but reflects risk the state’s rating will drop in the future. Two major credit ratings agencies, Standard and Poor’s Global Ratings and Moody’s Investors Service, have dropped Illinois’ credit outlook to “negative” from “stable” on expectations that economic fallout from COVID-19 will strain state budgets.īoth currently rank Illinois bonds just one notch above non-investment grade debt, also known as “junk” status, while the third major agency, Fitch Ratings, puts Illinois slightly higher at two grades above junk. ![]() Illinois’ financial outlook was changed from ‘stable’ to ‘negative’ by two major ratings firms, raising the risk the state’s credit rating will formally fall to non-investment grade status. Illinois moves closer to becoming first ‘junk’ state with negative credit outlook
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