by Ted Dabrowski
Vice President of Policy
Gov. Quinn is not getting great press these days.
The Cato Institute recently ranked him the worst governor in the nation. His approval rating stands at just 26 percent. And while Gov. Quinn may choose to ignore those messages, he may want to heed the warnings the financial markets continue to fire his way.
Credit agencies have hammered Illinois constantly since Gov. Quinn assumed office in early 2009. Who would have thought that Moody's, S&P and Fitch would downgrade Illinois 10 times after Gov. Blagojevich was finally removed from office?
The reality is that Moody's now recognizes Illinois as the worst credit risk in the nation – worse, even, than California and New Jersey.
Illinois has the worst credit rating in the nation
Source: Moody's Investors Services
Moody's downgraded Illinois in January, citing the fact that lawmakers "took no steps to implement lasting solutions" to the pension crisis or to the $8.5 billion backlog of unpaid bills.
In August, S&P lowered the state's rating after lawmakers failed to pass pension reform during the regular and special legislative sessions.
Illinois' credit rating now pales with that of Indiana, Iowa and Missouri. Those three border states, with which Illinois competes for investors and job creators, all have triple-A ratings, the best credit rating possible.
Who cares about credit ratings?
A credit rating is a catchall for how well a state is being run. Illinois' structural deficits, failed governance and poor economic growth all have contributed to the state's low credit ratings.
Poor ratings act as a warning for investors looking to put their money to work and for businesses hoping to expand and create jobs. In Illinois' case, it's just another reason for businesses and residents to leave the state or avoid coming in the first place.
And like people with poor credit scores, the state must pay higher interest rates. Illinois now pays 1.45 percentage points more than the nation's AAA-rated states on 10-year bonds. The most recent market numbers show Illinois borrowing rates at 3.25 percent, while AAA states borrow at just 1.8 percent.
The Quinn premium
Difference in interest rates between Illinois and AAA-rated
states on 10-year general obligation bondsSource: MMD
Interestingly, when Gov. Blagojevich was in office, Illinois paid just a small premium over what the AAA-rated states paid. But since then, Illinois interest rates have soared in comparison with other states. Those rates are now the the highest in the nation.
Higher rates mean even higher interest payments that drain the budget and leave less money for education, health care and public safety. For every $1 billion dollars of new borrowing, Illinois must pay more than $14 million in additional interest payments when compared to AAA-rated states.
The Quinn Premium
It's no coincidence that Illinois' riskiness jumped just as Gov. Quinn took office.
Gov. Quinn policies have done little to help Illinois – in fact, they've made things worse. He took over from a besieged Blagojevich and had every opportunity to aggressively reform a culture of failed governance, deficits and cronyism.
Instead, he continued many of the same failed policies and avoided reform. In fiscal year 2010, he added more debt onto future generations by borrowing $3.5 billion to fund the pension system. That was straight from Blagojevich's 2003 playbook, when the former governor borrowed $10 billion to fund pensions. Unabashedly, Quinn avoided reforms again in fiscal year 2011, when he borrowed another $3.7 billion.
And when Quinn couldn't borrow any more, he resorted to raising taxes. Quinn and the legislature hiked taxes by a record $7 billion. He promised that these were "temporary tax increases" that were "designed to pay our bills, get Illinois back on fiscal sound footing and make sure that our state has a strong economy."
Instead, the state still has $8.5 billion in unpaid bills, the rating agencies have continued to downgrade Illinois and the state's unemployment rate is one the worst in the nation. The tax hike, which flooded the state's coffers and removed the immediate impetus for reform, was an utter failure.
Gov. Quinn's policies have earned him 10 credit downgrades, more than three Blagojevich garnered during his six years in office. That should be a clue that his policies are moving the state in the wrong direction and toward a serious fiscal crisis.
Illinois downgrades during Gov. Quinn's tenure
Source: Commission on Government Forecasting and Accountability
As an experiment, Gov. Quinn might try to reign in spending, reform pensions and bring down taxes.
It just might earn him an upgrade – and a higher approval rating to boot.
image credit: (December 15, 2008 - Source: Scott Olson/Getty Images North America)