How state’s downgraded bond rating affects capital infrastructure projects

By Chrissy Mancini Nichols

Jan 8, 2010

The post first appeared at

Halfway through the fiscal year, Illinois is $9 billion in the hole, its credit rating has been downgraded, and it's been put on negative watch.

On Wednesday, Illinois Comptroller Dan Hynes released budget numbers that present the horrific details of the state’s budget mess, calling it the, “most dangerous fiscal condition in modern history.”  We’re only six months into the 2010 fiscal year, and Illinois state government already owes $8.75 billion to service providers, schools, and short-term bond holders.  A consequence of all this debt: Illinois' bond rating has dropped. That means when the state begins to solicit buyers for bonds to fund the $31 billion Illinois Jobs Now! capital program signed into law last year, it’s going to have to pay back the bond debt at a higher interest rate, resulting in hundreds of millions or even billions more in interest payments and fewer dollars to fund infrastructure projects such as improving and expanding our public transit system.

Short-term borrowing and bond rating

So far this fiscal year, the state has short-term borrowed $2.25 billion to pay off some of its bills.  That debt must be repaid on five specific dates between March 23 and June 10, 2010.  It’s unclear where the state will get that money. If the payments aren’t made, Illinois jeopardizes its credit status even further. In December, Moody’s Investor Service lowered the state’s bond rating a notch to A2 with a negative outlook. Standard & Poor’s also lowered its rating a notch in December, to A+ with a negative outlook, citing "Illinois failed to address its fiscal 2009 deficit, which was carried into fiscal 2010."  Only California, which recently issued paper IOUs, has a lower bond rating than Illinois. 

Why bond rating matters

The state's bond rating is important because it affects the interest rate at which the state must pay bonds back. A higher interest rate results in higher interest payments and less money to fund capital projects. It also affects other state-backed bonds for RTA, CTA, and public university capital projects.  Moody’s lowered the RTA’s rating one level to an Aa3 in June and, in September, lowered the CTA's one level to A1. Illinois' public universities are now on the watch list for a possible downgrade.

Illinois General Obligation Bond Ratings
Rating Agency Jul-97 Jun-98 Jun-00 May-03 Dec-08 March-July 2009 Dec-09 Maximum Rating
Standard & Poor’s AA AA AA AA AA AA- A+ AAA
Moody’s Investor Service Aa3 Aa2 Aa2 Aa3 Aa3 A1 A2 Aaa/Aa1

Source:  Illinois Commission on Government Forecasting and Accountability

Note:  The more “A’s” and higher the number, the better the rating.


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