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MOODY’S
CLEARS THE AIR: ILLINOIS UNDER REVIEW FOR POSSIBLE DOWNGRADE TO ‘JUNK’
STATUS BECAUSE OF DEBT CRISIS
Illinois Policy Institute/Michael
Lucci
Though the Illinois House of
Representatives appears close to overriding Gov. Bruce Rauner’s veto of
a tax hike budget plan, and thereby ending Illinois’ more than two years
without a full-year budget, Moody’s Investors Service has said it might
still downgrade the state’s credit, largely due to Illinois’
unsustainable debt.
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 Moody’s Investors Service issued a
statement July 5 explaining that Illinois is in a deep debt crisis, which the
tax hike passed by the General Assembly won’t resolve. Moody’s is reviewing
Illinois’ debt and might downgrade the state’s credit to “junk” status even if
lawmakers override Gov. Bruce Rauner’s veto of the tax hike and budget proposal
and they become law. That’s because the tax increase and budget proposal passed
by the legislature don’t tackle the state’s core problems; they merely address
the symptoms.
In other words, the General Assembly is putting a tax hike Band-Aid on a gaping
financial wound. And that Band-Aid is paid for by raising taxes by $1,100 on the
average Illinois household.
Illinois’ massive debt means long-term budget problems
The problem is that Illinois has unsustainable debts and not enough economic
growth to expand the tax base. House Speaker Mike Madigan and Senate President
John Cullerton have shepherded a tax hike plan that raises taxes but does
nothing to rein in the cost drivers – such as pensions and unaffordable
government worker compensation and benefits – that have saddled Illinois with so
much debt. And the new tax hike will further hamper economic growth by driving
still more people – and taxable income – out of the state, and reducing economic
activity.
 The legislative Democrats’ tax proposal only prolongs Illinois’ unsustainable
spending while putting off the day of reckoning with the debt. In Moody’s words:
“So far, the plan appears to lack concrete measures that will materially improve
Illinois’ long-term capacity to address its unfunded pension liabilities.”
Moody’s statement helps illustrate the difference between a debt crisis and a
cash-flow crisis. Illinois has both – the state’s inability to pay its current
bills is a cash-flow crisis, and the state is drowning in long-term debt. These
two crises exacerbate each other. The interest payments on the state’s long-term
debt increasingly soak up the state’s financial resources, making it more
difficult to produce an annual budget in which spending commitments do not
outrun tax revenues and other money that flows to state coffers.
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Illinois’ debt stands to be downgraded
by Moody’s even if tax rates rise. Moody’s pointed out that the
Democrats’ tax and budget plan fails to address core credit issues,
including:
Illinois’ $251 billion pension liability (Moody’s estimate)
Illinois’ $15 billion backlog of bills
It’s worth noting the budget plan also fails to address nearly $60
billion in long-term debt for retiree health care and tens of
billions in bonded state government debt; the state is not even
covering the annual interest cost on these debts. And the budget
plan and tax hike don’t solve the problem of the tens of billions
more in unsustainable debt carried by major local governments in
Illinois, such as Chicago and Chicago Public Schools.
The Land of Lincoln is not even treading water on its debt service;
that’s why the debt goes up each year. The state is drowning in red
ink.
Moody’s also points out that Illinois lawmakers are using
questionable math about tax collections. That’s because Illinois is
already experiencing massive out-migration and weak economic growth,
which are affecting current tax collections. From Moody’s note:
“The state’s baseline tax collections declined in fiscal 2017,
suggesting that any tax increase may yield less revenue than
anticipated in coming months.”
In other words, Illinois lawmakers are coming for taxpayers’
pocketbooks again, and this tax hike merely draws out the timeline
when policymakers will get to work solving Illinois’ real crisis.
Illinois is in a long-term debt crisis, yet state politicians are
raising taxes to solve a short-term cash flow problem. The
tax-hikers are voting to relieve the political pressure they feel,
not the financial pressure that taxpayers feel, nor the state’s
mounting debt crisis.
Illinois’ 2017 tax hike will end the same way as the 2011 tax hike –
as a costly mistake. Residents will continue to pour out of the Land
of Lincoln, and the state’s debts will spiral out of control. If the
House overrides Rauner’s veto, 2017 may be seen as the year Illinois
passed up its last opportunity to avoid a financial meltdown.
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