Moody’s clears the air: Illinois under review for possible downgrade to ‘junk’ status because of debt crisis

Moody’s clears the air: Illinois under review for possible downgrade to ‘junk’ status because of debt crisis

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.

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.

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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