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Monday Map: State Credit Ratings

3 min readBy: Liz Malm

Today’s map shows Standard & Poor’s (S&P) credit ratings for each of the 50 states. States are rated from AAA (the best and most creditworthy) to D (default on financial obligations). While no state is ranked worse than A-, there is still variation among them. California formerly held the title as the worst-rated state in our last version of this. Illinois now holds that title.

Here’s the breakdown of state rankings:

  • 13 states are ranked AAA, indicating that these states have “extremely strong capacity to meet financial commitments”;
  • 15 states have a AA+ ranking;
  • 16 states are ranked AA;
  • 4 states have a AA- rating;
  • One state (California) is ranked A; and
  • Only one state is ranked A-, the lowest rank among states (Illinois).

Check out the map below to see how your state compares.

Six states had recent ratings actions. All but two (Vermont and New York) were negative. The changes in Vermont and New York weren’t enough move up a full rating level, but S&P changed their outlooks from “stable” to “positive,” which is a good sign for these states. The remaining five states either had a decrease in their outlook designation (Kentucky, California, and New Jersey) or a downright rating downgrade (Illinois). Illinois’ rating was downgraded twice—first in August of 2012 (from A+ to A) and again in January 2013 (from A to A-).

According to S&P, there are a few reasons why credit ratings can change:

The reasons for ratings adjustments vary, and may be broadly related to overall shifts in the economy or business environment or more narrowly focused on circumstances affecting a specific industry, entity, or individual debt issue.

In some cases, changes in the business climate can affect the credit risk of a wide array of issuers and securities. For instance, new competition or technology, beyond what might have been expected and factored into the ratings, may hurt a company’s expected earnings performance, which could lead to one or more rating downgrades over time. Growing or shrinking debt burdens, hefty capital spending requirements, and regulatory changes may also trigger ratings changes.

While some risk factors tend to affect all issuers—an example would be growing inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. that affects interest rate levels and the cost of capital—other risk factors may pertain only to a narrow group of issuers and debt issues. For instance, the creditworthiness of a state or municipality may be impacted by population shifts or lower incomes of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers, which reduce tax receipts and ability to repay debt.

Illinois’ most recent downgrade is directly related to their underfunded pension system. S&P issued the following statement in January:

“The downgrade reflects what we view as the state’s weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Standard & Poor’s credit analyst Robin Prunty. …The aggregate pension funded ratios on an actuarial basis declined to 40.4% at fiscal year-end 2012, compared with 43.4% in fiscal 2011. Based on the state’s current projections, the funded ratio will decline further to 39% in fiscal 2013. The continued decline in pension funded ratios is due in part to contributions below the annual required contribution, investment returns below assumptions, and lower investment return assumptions. While legislative action on pension reform could occur during the current legislative session and various bills have been filed, we believe that legislative consensus on reform will be difficult to achieve given the poor track record in the past two years.

Moody’s Investors Services, another credit ratings agency, also downgraded Illinois this year.

For a full explanation of the possible credit ratings, see S&P’s FAQ page.