Illinois taxpayers are paying an extra $16.1 million annually in interest on the state's bonds because of its worst-in-the-nation credit rating, according to a report from the Illinois Policy Institute. Even after recent upgrades from Moody's Ratings and S&P Global Ratings, the state continues to struggle with the lowest credit standing in the country, driven by a persistent pension crisis and sluggish economic growth. The report highlights how Illinois' financial challenges translate directly into higher borrowing costs that burden state finances.
Illinois' net unfunded pension liability sits at approximately $143.5 billion as of June 2025, with just 47.8% of what the state needs to cover future obligations to retirees actually funded. State contributions toward pensions reached $11.7 billion in 2026 and are projected to climb to roughly $18.6 billion per year by 2045, consuming about 20% of general fund spending. Meanwhile, the state's population has dropped by around 168,000 residents since 2018, giving Illinois the 48th-ranked annual compounded population growth rate nationwide. Private sector employment growth between 2018 and 2025 fared similarly poorly, expanding just 0.4% compared to the national rate of 6.72%, placing Illinois 46th among all states. A Charles Schwab analysis using Bloomberg data found that Illinois' 10-year bond yields run 62 basis points, or 0.62%, above bonds issued under a generic 10-year AAA index.
Since Governor J.B. Pritzker took office in 2019, the state has received five upgrades from Moody's, moving from Baa3—the lowest investment-grade rating and one step above junk status—to A1. S&P has raised Illinois' rating four times from BBB- to A, with the governor's office citing 12 total upgrades when including Fitch Ratings. According to the report, Moody's identified two primary factors dragging down the state's credit score: the massive unfunded pension obligations requiring ever-larger state payments, and Illinois' considerably slower economic expansion compared to the rest of the nation, fueled by residents and businesses leaving the state and shrinking the revenue available for debt obligations.
These twin pressures create a reinforcing cycle that limits Illinois' fiscal flexibility and creditworthiness. Because pension contributions take up such a large share of the budget, the state has less room to make debt payments, which damages its credit rating and forces it to pay higher interest rates on new borrowing. The population decline and weak job growth further constrict the tax base, leaving fewer resources to tackle the pension shortfall. In 2025, Illinois fell $198 million short of the "tread-water" cost—the amount needed just to prevent unfunded pension liabilities from growing larger. For fiscal 2026, Illinois ranked third-lowest nationally in rainy-day reserves relative to spending, holding enough to fund roughly 16 days of operations compared to a national average of about 56 days, leaving the state vulnerable when economic downturns hit.
To earn additional upgrades, Moody's recommends that Illinois make the required contributions to its pension system to stop unfunded liabilities from ballooning and that the state maintain balanced budgets while building larger rainy-day reserves to weather financial shocks. S&P echoed similar guidance, urging Illinois to meet the actuarially determined pension contributions—the figures the state's own actuaries say are necessary for proper funding—which Illinois routinely fails to pay in full. Without addressing both the pension crisis and the exodus of residents and businesses, the report suggests Illinois will continue paying a premium to borrow money while its capacity to meet those obligations keeps shrinking.