Moody’s right, S&P wrong on Illinois budget
Illinois’ bond rating may not be junk, but the state’s finances still are.
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.”
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.”
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
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.