The credit rating agency S&P downgraded the State of Illinois general obligation bonds one notch to A- from A, matching that of California. The reason for the downgrade is the inability of the State to address weakening pension funding ratios. Readers of our market notes have read about growing pension liabilities for several years now, so the downgrade of Illinois should not come as a surprise, as we have eschewed the state debt, and not relied on ratings agencies for our assessment. SNW remains committed to the analysis of credits to assess their individual credit risks. Let’s look at an example: In many states, education funding formulas can have a multiplier effect on credits that receive material state aid and, because of the multiplier effect, the correlation of operating performance and credit quality to economic fundamentals may be lower. For example, Oregon’s Department of Education uses a formula based on average daily membership (ADM) to allocate resources. ADM is a proxy for enrollment and is adjusted by wealth and poverty factors to equalize disparities between school districts. Due to changes in ADM, some school districts’ credit profiles continue to weaken while others are stabilizing or even exiting the malaise of the recession. Two such credits are Deschutes County School District #6 (Sisters) and nearby Bend LaPine SD #1, where ADM changes resulted in significantly different operating results. Bend LaPine’s credit profile improved while Sisters weakened between 2010 and 2011. What is more interesting is the close proximity between the two, only 23 miles apart. In conclusion, state funding formulas can have a multiplier effect on credits that receive material state aid and in-depth research is important to identify ongoing credit quality, as some results may be counterintuitive due to the methodologiesused to apply state funding.