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.
In October 2002, S&P 500 downgraded Kentucky's credit rating to AA- from AA due to financial difficulties and the lack of a budget in the General Assembly. The loss of manufacturing jobs in the state has taken a toll on the economy.
In December 2003, Michigan lost its stellar AAA rating as a result of the fallout from the failing auto industry, and it was downgraded to AA+. The state has continued to struggle and in April 2007 saw its credit rating fall to the current AA- because S&P 500 said Michigan had failed to take real action to balance the budget for the long term.
New Jersey: AA-
In February 2011, New Jersey was downgraded to AA- from AA. S&P 500 said the state's finances were being strained by huge pension obligations, high debt levels and generous unemployment benefits.