As Comptroller of the State of Illinois, it is my responsibility to issue the bonded indebtedness report. The fact that in the last five years, the ratings on Illinois' general obligation bonds have lowered several times, (twice by Standard & Poor's and three times by Moody's Investor Services) is a concern because credit ratings are one of the factors that determine how much the state has to pay when it sells long-term bonds.

Borrowed money is not free money. In its most basic form, borrowing is trading money today for the promise to pay the money back, plus interest, in the future. When the state borrows, it has to compensate lenders for the risks associated with giving up money today in exchange for a stream of future payments.

The financial condition of the state plays a crucial role in shaping the market's perception of repayment risk. The rating agencies have placed special emphasis on the trends in financial condition as a key determinant to the rating that is assigned to a particular borrowing.

In an effort to keep the analysis of financial condition on a consistent basis from year-to-year, the ratings agencies focus a great deal of attention on the financial condition as reported under Generally Accepted Accounting Principles (GAAP).

The last time Illinois' GAAP balance was positive was in 1989. In Fiscal Year 1994, continued strong revenue growth contributed to the first improvement in the GAAP balance since 1989. But even that improvement was muted by the further accumulation of unpaid Medicaid claims.

Fiscal Year 1995 was one of the most successful years in recent history, both in terms of revenue received and improvement in the state's financial condition. On that basis, the GAAP deficit is likely to show a second year of improvement. From the rating agencies' perspective, however, Illinois has to demonstrate that this trend will continue. And, we in the Office of the Comptroller, believe that in Fiscal Year 1996, we will see the trend continuing. •

October 1995 / Illinois Municipal Review / Page 23