Both Moody’s and S&P recently affirmed Illinois’ one-notch-above-junk rating in preparation for the state’s upcoming bond, even as Moody’s continues to maintain a negative outlook on Illinois’ rating. That means a downgrade by the agency is more likely than an upgrade in the next year.
The reasons for the rating agencies’ pessimism are obvious. It’s not just what lawmakers have failed to do, it’s what lawmakers continue to do that’s dragging the state down.
The state continues to operate at a deficit despite nearly $5 billion in new taxes in 2018. And the shortfalls aren’t being compensated with spending reforms. Instead, the state continues to primarily use interfund sweeps to make the general budget balance. And the agencies don’t expect any big reforms this year – not with a stalemate that might ensue during this campaign season.
Bond investors are demanding a heavy price from Illinois for the increased risk they are being asked to take.
According to Municipal Market Data, Illinois will pay yearly interest rates that are 2.1 percentage points higher than the states with the best credit ratings – states that include Indiana, Iowa and Missouri. By comparison, states like Connecticut and New Jersey, states with severe pension crises, only pay about 0.85 percentage points more than the best-rated states. Illinois and its taxpayers are being heavily penalized for the state’s fiscal and governance mess.
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