In last week’s note we wrote about the failure of New Jersey to meet income tax revenue estimates, which led to a significant budget deficit. This past week we witnessed the State of Illinois borrowing, delaying payments and drawing down what little reserves it had in order to pass its Fiscal Year 2015 budget. The Illinois State Legislature was unable to extend personal and corporate income taxes that sunset on December 31, 2014, or reduce spending by the $2.0 billion needed to offset the lost income tax revenue. The dysfunction in Illinois further weakens the State’s financial position. The chart below details the State’s net assets as a percent of expenditures, showing that it is already negative. This metric measures Illinois’ capitalization ratio, and a negative number is one indication of increased default risk. There are only two other investment grade states that have a negative capitalization ratio – New Jersey and Connecticut. Similar to the case with New Jersey, we feel the long-term prospects of Illinois remain weak until spending matches revenue and long-term liabilities are better managed.