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Schooling the state on getting good credit

Wed, Feb 20, 2013

SPRINGFIELD – I remember my consumer education teacher at Galesburg High School explaining how to achieve a good credit rating.

We learned that the worse your credit rating, the harder it is to borrow. And when people with bad credit do borrow, they pay a much higher interest rate.

Here are my teacher’s tips on having good credit:
• Pay your bills on time.
• Don’t spend more than you earn
• Don’t borrow too much.
• Don’t make financial promises you can’t keep.

If only our current state leadership could have sat through that class 30 years ago.

They might have learned something.

Standard and Poor’s Rating Services just dropped Illinois’ credit rating to A- from A. There is not another state in the Union with credit as lousy as ours. We are worse off than California.

We got in this predicament the same way a person with bad credit would.

Just consider:
• Illinois pays its bills as much as five months late.
• Last year the state spent $738 million more than it took in.
• The state is dripping with debt.
• Under new accounting rules, the state’s unfunded pension liabilities exceed $200 billion.

Since Gov. Pat Quinn took office in 2009, the three major rating agencies have downgraded the state’s credit worthiness 11 times.

Because of this, Illinois now pays 1.45 percentage points more than the nation’s top-rated states on 10-year bonds.

“It’s really important to remember that we have had 20 downgrades in the entire history of the state and 11 of them have been under Pat Quinn,” said state Senate GOP leader Christine Radogno. “We have seen a period of time here that we have been woefully lacking in leadership and the ability to get something done. I think that has led to the downgrade.”

It’s easy to dismiss percentage points and terms like “junk-bond status” as Wall Street concerns of little importance to the rest of us.

But rating agencies provide an independent voice with a prognosis on our state’s financial health. And paying higher interest rates on bonds may mean less money for schools, fewer state troopers patrolling highways and even longer lines when you renew your driver’s license.

It can even mean slamming the brakes on a $500 bond issue intended for school and transportation capital projects, which happened Jan. 30. In a prepared statement, Gov. Quinn’s office attempted to downplay its decision to hold off on the bond issue:

“Our conversations with potential bidders lead us to believe the market is unsettled because of recent actions and comments by the bond rating agencies. We plan to schedule a new bond sale after the markets have had time to digest the news.”

But Bob Williams, president of State Budget Solutions, a nonpartisan group dealing with fiscal accountability, said the delay has more to do with S&P’s downgrade to worst-in-the nation status.

“This is absolutely crazy. Why is a state in such bad shape trying to borrow more money?” Williams said. “Frankly, I think rating agencies have been too generous with Illinois. It should have junk-bond status now. But they haven’t quite grasped the depth of Illinois’ economic problems.”

State Sen. Mike Jacobs, D-East Moline, said Illinois is at a breaking point.

“Every governor – Edgar, Thompson, Ryan – has struggled with Illinois’ finances,” he said. “In fact, every governor since Ogilvie has struggled with this issue. Illinois wants to spend more than it takes in. We have to decide whether to cut spending or seek an infusion of cash.”

But Williams contends seeking a tax increase would have dire consequences.

“What happens when you raise taxes is that businesses just leave,” he said. “Illinois already has a less favorable business climate than its neighbors like Indiana, Michigan and Iowa, which are Right-to-Work states.”

“It’s a bit unfair to blame Pat Quinn for all of this,” Jacobs said. “Those rating agencies did next to nothing before he came into office. It looks to me like now they are covering their backsides. A lot of legislators are responsible for the financial situation the state is in, too.”

Illinois politicians like to trot out familiar bromides such as: “There are no easy solutions.”

Maybe not, but places like Kansas are actually considering eliminating state income taxes. Illinois lawmakers, on the other hand, jacked up our tax rates 67 percent two years ago. Rhode Island has embraced pension reform while Illinois has dithered.

And before we start hearing that Illinois needs to raise its taxes again to improve its credit, please note that the state is taking in more tax revenue now than it has at any time in its 195-year history.

Yeah, you read that right.

We are taking in money at a steady clip, but still heading toward bankruptcy.

Illinois’ problems are on the spending front.

It’s time for Illinois’ leaders to get serious about getting the state’s fiscal house in order. Without real pension and spending reform, rating agencies will continue to downgrade Illinois’ credit and the state’s debt will continue to swell.

Written by Scott Reeder,
StreetWise Contributor

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