Illinois has just barely avoided the dishonor of becoming America's first "junk" state.
Moody's decided on Thursday that it won't downgrade Illinois because the cash-strapped state finally passed its first budget in more than two years. S&P Global Ratings similarly removed the threat of an imminent downgrade last week.
Moody's concluded that the Illinois budget deal -- which includes a 32% tax hike -- is enough to ease the enormous financial pressures facing the state. Illinois had built up $15 billion in unpaid bills, affecting everything from mental health services for teens to funding for state colleges and universities.
Even though Illinois has dodged another downgrade bullet, the state remains in financial disarray. After decades of mismanagement, Illinois has built up a stunning pension shortfall of $251 billion that will continue to grow, according to Moody's.
That's why Moody's is keeping a "negative" outlook on the state, signaling further action could come in the next 12 to 24 months if Illinois gets back into trouble.
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In addition to the "severe" pension shortfall, Moody's said Illinois continues to grapple with a "weak governance" system and "residual political paralysis."
It wasn't clear if the budget compromise was going to be enough for Illinois to avoid a downgrade. Moody's had warned right before the budget was enacted on July 6 that potential "shortcomings" in the deal could trigger a downgrade from its organization.
Moody's reiterated on Thursday that there is a risk that Illinois will fail to cut spending and raise tax revenue by as much as the budget calls for.
Moody's said the state's failure to enact a budget for two straight years is partially the result of the state's pension time bomb, which was caused by politicians delaying tough decisions.
"As the liabilities have grown more difficult, so have the potential political repercussions of addressing them," Moody's said.
