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Moody’s Report on Illinois’ Financial Woes

Moody’s is one of the largest credit rating agencies for American municipalities and states. On August 31, they issued the following re Illinois’ budget problems: Moody’s Illinois Ratings . Reading the entire report is worthwhile, but everyone is busy. I took the liberty of distilling the most important points made and putting them in plain English.

  • Illinois’ current budget delay is not impacting the state’s credit rating because its mediocre (A3 negative) rating has already factored in weak governance that can cause such delays. How well an eventual agreement addresses the state’s long-term fiscal problems is far more relevant for the ultimate rating. Moody’s view of this delay will change however, if the budget impasse is not resolved relatively soon.
  • Costs of constitutionally protected pension benefits are rising. Funding pressures will be further compounded by retiree healthcare benefits costs, which are rising at about 6.5% per year. Retiree benefits account for roughly 24% of the current general fund expenditures, so crafting a long-term plan to ensure Illinois’ statutory funding requirements is critical to improving the state’s credit rating.
  • The approximately $5.4 billion currently projected state deficit can be fairly readily resolved through a combination of spending cuts and revenue increases including reinstating higher income tax rates.
  • Illinois is one of only eight states that levy a flat individual income tax and its current rate at 3.75% is below the national average of 4.4%. Moody’s believes that the current deficit can be addressed by raising the state income tax to 4.75% for the second half of the year. This would generate an additional $2.2B of revenue which would then require the state to cut expenditures by slightly more than half what was proposed in Governor Rauner’s 2015 budget.

The bottom line — if the Governor and the Democratic majorities in both houses of the legislature continue their impasse, the state’s costs are going to go up from a Moody’s credit downgrade and the state’s ability to pay its bills will deteriorate. What this report makes clear is that the mix of revenues and spending cuts is not rocket science. What we need are Illinois political leaders that are prepared to put the economic health of the state above their ideological differences. There is no state that needs a revival of the art of political compromise as does Illinois.

Robert Hoyt, Ph.D.
Allied Health Professionals LLC

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