Illinois taxpayers will foot bill for bond rating drop

(MCT) — The news was expected — so much so that it didn’t garner huge headlines.

But the impact of Standard & Poor’s bond rating announcement on Friday will hit Illinois taxpayers in their bank accounts.

Standard & Poor’s reduced the state’s general obligation bond rating from A to A-. The agency applied the lower rating to $500 million in general obligation bonds the state plans to release next week.

In the bond rating game, A is not a good grade. In fact, the downgrade gives Illinois the lowest rating of any state in the nation. Ratings agencies don’t grade on the curve.

The agency also added the outlook was negative, meaning that it could downgrade the state’s credit rating again if action isn’t taken to fix the state’s financial problems.

The lower rating generally means that Illinois taxpayers will pay a higher interest rate when the state issues bonds for construction projects and other needs. Issuing bonds is the way the state borrows money.

What Standard & Poor’s is saying, in so many words, is that Illinois isn’t a great credit risk. Investing in Illinois is riskier than investing in any other state in the union. That extra risk means investors deserve higher interest rates.

The lowered credit rating has everything to do with the state’s inability or unwillingness to deal with the $96 billion in unfunded pension obligations. The General Assembly failed to reach any sort of solution during the lame duck session earlier this month.

The pension payments not only are causing the state’s credit rating to go down, but they also are eating up a larger part of the state budget. Nearly one-third of the state’s general revenue will have to go toward pension payments, crowding out a lot of other government spending on education, health care, public safety and other necessities.

There are a lot of proposals being considered or introduced as legislation for the new session. But Standard & Poor’s wasn’t impressed.

“While legislative action on pension reform could occur during the current legislative session and various bills have been filed, we believe the legislative consensus on reform will be difficult to achieve given the poor track record in the last two years,” the analysts said.