On Nov. 3, Fitch Ratings issued an extensive comparison of the three states with the lowest credit ratings: Illinois, California and New Jersey. These are the only three states rated below the “AA” category by Fitch.
The report noted that at this time “Fitch judges California to have the strongest credit profile and Illinois the weakest.” In fact, according to Fitch, Illinois’ credit rating remains the worst in the nation at A-/Negative, with California ranked A/Stable and New Jersey ranked A/Negative. The Negative outlook reflects “the direction the rating is likely to move over a one- to two-year period,” as compared to California, which Fitch noted is in a “relatively strong” position as a reflection of “a combination of cyclical recovery and institutional changes.”
Fitch compared the three states in four areas, including the states’ debt and liabilities, the economy, finances and management.
The rating agency noted that “Illinois’ ‘A-’ rating with a Negative Rating Outlook” reflects the state’s record of unwillingness to address numerous financial challenges, which have steadily increased in magnitude as a result. Fitch stressed that “Waiting until the last minute to resolve critical issues has long been endemic to management in Illinois.” Specifically at issue, according to Fitch, is the failure to prepare for and address the pending expiration of the temporary income tax increase, noting, “As a result, the state is now facing a hole in the current-year budget that grows significantly in the following fiscal year.”
Fitch applauded the state’s 2013 passage of pension reform as a way to address Illinois’ unfunded pension liability burden, which is well above that of California and New Jersey. They also noted that Illinois’ “actual annual pension funding is not as far below actuarially sustainable levels as in those states, and more manageable.” That said, even if the pension reform enacted in 2013 survives the current legal challenge, Fitch says the state’s unfunded pension liabilities are “exceptionally high and are expected to remain so,” in addition to the state’s “above average” debt burden, which increased during the recession as a result of Democrat lawmakers’ reliance on “deficit financing.”
While Democrats have continued to blame the state’s lagging economy on the recession, Fitch says “Illinois was not as negatively affected by the recession as some neighboring Midwestern states…its recovery continues to be weaker.” It also noted that the state’s population continues to steadily decline when compared to the national rate, and criticized the structural issues in Illinois saying, “Although it has the power to do so, the legislature in Illinois has a long record of failing to address key challenges in a timely fashion.”