Illinois’ Rating Reversed to Negative Due to Unbalanced Budget

July 25, 2014

Less than a month into the new fiscal year, which began on July 1, Standard and Poor’s announced that the financial outlook for the State has deteriorated from “developing” to “negative.” The rating agency directly blamed the FY2015 budget approved by the Governor and General Assembly for the change in perspective.

An analyst from S&P stated that the budget was not structurally balanced, which would cause liquidity pressures for the State and that there was concern over the implementation of pension reforms passed in December 2013 due to a recent Illinois Supreme Court ruling on health insurance for State retirees, known as the Kanerva case.

The change in outlook reverses the improvement from “negative” to “developing” that was announced by S&P shortly after pension reform was passed late last year. The overall rating for Illinois remains at A- by S&P, the same level it has been since the last downgrade in February 2013.

Shortly after the State’s budget for FY2015 was enacted, Moody’s Investors Service criticized the State budget for weaknesses similar to S&P’s analysis. Moody’s also recently commented on the legal challenges to the State’s pension reform legislation as a “credit negative” due to language in the Kanerva ruling that seems to cast doubt on the constitutionality of the new pension law. However, the rating agency maintained its rating of A3 and already had a negative outlook on the State.

Fitch Ratings affirmed its rating of A- with a negative outlook in conjunction with the State’s May 2014 bond issuance but has not commented further since the FY2015 budget was enacted. Illinois has the lowest bond ratings among all 50 states for all three agencies.

The following table shows bond ratings for Illinois at the beginning of each fiscal year dating back to FY2008.


Moody’s endorsed the Governor’s recommended FY2015 budget as a credit positive. The Governor proposed making the higher income tax rates permanent. However, the General Assembly rejected the extension of the higher tax rates and the State now faces a loss of revenue totaling $1.7 billion in FY2015.

According to S&P the change in outlook means the State could be further downgraded sometime in the “two-year outlook horizon.”