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Six States With Embarrassingly Low Credit Ratings
Governments — from sovereign nations to states and localities — are measured on their ability to manage their finances and pay back what they owe.
In issuing credit ratings, agencies such as Standard & Poor’s 500 index evaluate criteria such as financial management, budgetary performance, and debts and liabilities.
S&P 500 assesses the creditworthiness of each state by looking at the framework of state government and the state’s economy.
Various measures are added up, and the state receives a credit rating, which could be as high as a perfect AAA, and continues down through AA, A and A-.
A state with one of the lower ratings will find that it will cost more to borrow money through the sale of bonds, and economic growth may be constrained in the future.
For state governments, credit ratings reflect the ability to pay debts and the strength of the state’s economy. A lower rating typically forces a state to pay higher interest costs on the debt securities known as general obligation bonds.
Thirteen states currently earn Standard & Poor’s 500 index’s highest possible credit rating, and another 31 are in the middle of the pack. Now, see the sagging six at the lower end of the scale.
In 2009, California’s credit rating fell to the lowest in the nation on the S&P 500 scale, from A+ to A, as a result of a budget deficit reaching into the billions. In January 2010, California’s credit rating was cut even further, this time from A to A-. S&P 500 apparently saw signs of improvement in February 2012, when it upgraded California’s financial outlook from stable to positive.
In December 2009, S&P 500 downgraded Illinois to A+ from AA- as a result of stubborn budget problems. In March 2012, the credit ratings agency announced that Illinois’ rating could fall by another several notches as a result of budget imbalances and unfunded pension liabilities. S&P 500 followed up with another threat in June.
Arizona’s credit rating was downgraded in 2009 to AA- from AA as a result of the housing crisis and constitutional limits on the state’s ability to raise revenue. But things are looking up: In December 2011, S&P 500 raised Arizona’s outlook from negative to stable as the state ended the year in the black with tax collections exceeding estimates.