Illinois Bond Rating Downgraded As State Seeks More Borrowing

05/31/2010 05:12 am ET | Updated May 25, 2011

Gov. Pat Quinn's proposed budget for fiscal year 2011 includes a mix of spending cuts, new revenues and increased borrowing. Unfortunately, that borrowing will be a little more costly than anticipated.

Fitch Ratings, one of the world's biggest bond-rating agencies, downgraded the state of Illinois's municipal bond rating to an A-, its fourth-lowest possible rating and the second-lowest in the country. On Tuesday, Moody's also assigned the state an A2 rating with a negative outlook, meaning a further rating downgrade is likely, according to the Daily Herald.

A lower bond rating means that lenders will charge more interest on the $1 billion in loans that the state is seeking for the coming year.

Illinois's rating was downgraded despite the state government's recent efforts to address its budget crisis. Earlier this month, Gov. Pat Quinn announced his budget proposal for 2011, which included deep spending cuts at all levels of government. Among the proposals was an evisceration of the public schools budget, which he hopes to avoid by increasing the income tax from 3 percent to 4 percent.

Just last week, in anticipation of the credit scores, House Speaker Mike Madigan pushed through a pension reform bill in record time, moving it from committee to passage in under 12 hours. Madigan had hoped that some effort to address Illinois's enormous unfunded pension liability would improve rating agencies' assessments of the state's financial health.

Still, though, the agencies were skeptical of lending money to the state. The Daily Herald reports:

The fiscal 2011 budget 'will not sufficiently' address the estimated general fund gap, expected to total $9.3 billion, or 33 percent of revenue, Fitch said in a report.

Prior to Quinn's budget announcement, that gap was estimated at anywhere from $13 to $15 billion. He hopes to use borrowing to help close the remaining deficit. In his annual budget address, he argued that doing otherwise -- simply not paying the bills -- was the equivalent of borrowing from schools, police and others.

But with the latest round of credit ratings, those may be the only places that will lend to Illinois.