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 S&P Global Ratings announced on July 12 that Illinois is no longer in immediate
danger of being rated “junk” by the credit rating agency. But the state is still
under review by Moody’s Investors Service, another ratings agency, for a
possible downgrade.
S&P kept Illinois rated at BBB-, one notch above junk status. However, the
agency removed Illinois from its “CreditWatch” status, meaning Illinois is no
longer likely to be downgraded by the agency within the next year.
S&P said it was removing Illinois from its watch list because it enacted a
budget after three years of financial and political impasse.
It said the “bipartisan vote” for a new budget brought the state’s finances
“much closer to structural alignment” and “reduces near term uncertainty.”
The agency also said the budget would finally allow Illinois to pay its most
important bills and to “reliably cover its priority obligations.”
Moody’s expressed the opposite opinion of Illinois’ budget.
On July 5 Moody’s announced it was placing Illinois “under review” for a
possible downgrade even if a budget passed.
Moody’s commented that the budget plan had a lack of “broad bipartisan support,”
saying it could lead to “shortcomings in its effectiveness.”
It warned simply passing a budget won’t be enough to avoid junk because it
doesn’t address Illinois’ many crises, including a “lack(s) concrete measures
that will materially improve … its unfunded pension liabilities.”
And Moody’s called into question whether Illinois would be able to pay its
bills, saying that a recent court ruling that forced the state to accelerate its
payment of Medicaid bills “cast(s) doubt on the state’s immediate ability” to
pay for Medicaid, pensions, debt service and school funding.
Politicians’ history of avoiding reform
Both S&P and Moody’s agree that Illinois’ massive pension debt and its pile of
unpaid bills are the state’s most pressing crises.
The agencies’ disagreement on Illinois’ credit appears to be related to how much
faith they have in Illinois’ politicians to fix those problems.
In its report, Moody’s said the budget plan was lacking because it failed to
include “concrete measures that will materially improve … its unfunded pension
liabilities.”
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The agency’s concerns
are well-founded. Illinois’ finances are in deep crisis not because
of the budget impasse, but because of the massive amount of debt the
state has accumulated over the years. According to Moody’s own
analysis, Illinois has $250 billion in unfunded pension debts, far
higher than the $130 billion the state says it owes.
In addition, the state officially owes $57 billion in retiree health
care debt and almost $30 billion in general obligation debt. Without
structural reforms that can begin to reduce those burdens, Illinois
is staring at some form of bankruptcy.
In contrast, S&P wanted
a budget first, and reforms could come later: “Balanced fiscal
operations are … a necessary precondition to improving [the state’s]
prospects for longer term solvency.”
S&P essentially rewarded lawmakers for passing an all-tax, no-reform
budget by removing the state from watch status, saying the budget
was an “affirmation of lawmakers’ collective willingness to
prioritize the state’s fundamental claims-paying ability at an
investment-grade level.”
But anyone who knows the long history of Illinois politicians’ bad
deals and their unwillingness to reform knows lawmakers are unlikely
to change anything.
The last time Illinois politicians hiked taxes was the 2011
temporary income tax hike. The hike took an additional $32 billion
from taxpayers’ wallets, but all that new money didn’t solve
Illinois’ financial problems.
Instead, it relieved Illinois lawmakers from pressure to enact
necessary spending reforms. Lawmakers simply spent the money and
left Illinois on a budgetary cliff when the tax hike expired.
This time will likely be no different.
Illinois’ budget puts Illinoisans last
Illinois is broke. Illinoisans are tapped out. The economy is
broken. Yet politicians’ only solution to the current crisis was a
multibillion-dollar tax hike on Illinoisans.
Instead of more taxes and more spending, state lawmakers should have
passed a balanced budget that actually solves the state’s structural
problems without resorting to tax hikes.
Moody’s is right to be cautious about Illinois’ financial future.
S&P is only setting itself up for disappointment, and Illinoisans
for more pain, by declaring Illinois safe from a junk rating for
now.
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