Despite state downgrade, city of Champaign's credit still resilient
During the summer, when Standard & Poor's downgraded the federal credit rating, I wrote that Champaign's finances were "resilient."
Last week, Moody's made Illinois its lowest-rated state in the nation when the credit agency downgraded the state from A1 to A2. According to Moody's, Illinois is behind even California when it comes to the states' ability to pay their bills (but don't worry, according to the other two agencies, Illinois is only the second-worst in the nation, ahead of California).
Despite the downgrade, it looks like the city of Champaign's finances are still resilient. Champaign Finance Director Richard Schnuer believes it will not affect the city's credit rating. He wrote this in an email to me:
"The agencies that rate the City's debt (Moody's and Fitch) have not made any announcements concerning possible adverse effects on local governments of the state downgrading. If the rating agencies had thought this was an issue they would likely have notified clients and the public."
Further, he said the city's credit rating was higher than the state's before the downgrade, anyway (actually, the city has the highest possible credit rating), so the overall picture has not changed.
That being said, there's still a small risk to the city in regards to its short-term finances. Illinois municipalities receive a portion of income tax revenue in the form of payments from the state. Those payments are proportional to a city's population, and for Champaign, it's several million dollars per year.
And like all the state's bills, there's not always a guarantee that payments will be made on time -- or ever.
Gov. Pat Quinn has said in the past that he has considered cutting those shared revenue payments to municipalities. The downgrade of the state's credit rating doesn't necessarily add to that threat, but it does raise the question of whether the state would cut shared revenue to pay other bills (pension payments, for example) in an attempt to improve its credit rating.
Just like with your personal finances, a lower credit rating ultimately affects the state's ability to get good interest rates on loans. Higher interest rates make those multi-million dollar capital projects that much more expensive, which means a heavier burden for taxpayers.
A hypothetical shared-revenue cut wouldn't affect the city's long-term ability to pay its bills (like pensions or bonds), Schnuer wrote, so it's unlikely to affect the city's credit rating. But it could have a short-term effect.
"If the State were to cut a significant portion of state-shared revenue to municipalities, the City would have to increase revenues or cut services to fill the budget gap," Schnuer wrote.