SPRINGFIELD – Fitch Ratings, one of three credit rating agencies that grade Illinois bonds, has upgraded its credit outlook for the state from “negative” to “positive.”
Although the state’s overall rating remains at near-junk status at BBB-, the agency said the state’s economic outlook coming out of the pandemic, combined with the recently-enacted budget, are moving the state in the right direction.
“The Outlook Revision to Positive from Negative, reflects Illinois’ preservation of fiscal resilience given the quick and sustained economic recovery since the start of the pandemic, coupled with the state’s unwinding of certain nonrecurring fiscal measures,” the agency said in a statement Wednesday. “Recent fiscal results and the enacted fiscal 2022 budget suggest further improvements in operating performance and structural balance in the near and medium-term that could support a return to the pre-pandemic rating or higher.”
The change in outlook is not the same as a change in the state’s immediate credit worthiness, but instead reflects the agency’s view of its credit trajectory, indicating the possibility of a credit upgrade in the future.
The continuing BBB- rating is the result of what Fitch called “a long record of structural imbalance and irresolute fiscal decision making” that has resulted in a credit position well below what the state’s broad, but slow-growing economy would otherwise suggest. It also reflects the state’s large, long-term liabilities such as pension obligations that will continue to put stress on the state’s finances.
But the agency also said that the state’s revenue base, primarily income and sales taxes, are expected to grow as the state’s economy grows, while recent improvements, such as paying down the state’s bill backlog and its plan to pay off its federal pandemic borrowing early, are signs of improved budget management.
The action by Fitch follows similar moves earlier this year by the state’s other two rating agencies, Moody’s and S&P, which revised their outlooks from “negative” to “stable.”
Democratic leaders in Illinois, including Gov. JB Pritzker, quickly seized on the news
“Fitch’s improved outlook for Illinois is yet another sign of positive momentum for our state’s fiscal condition, a testament to strong financial management and responsible actions by the General Assembly and my administration, and a product of the state’s economic resilience,” Pritzker said in a statement Wednesday. “The story of Illinois in 2021 is that in the face of a crisis, fiscal discipline and smart economic policy pays off.”
House Speaker Emanuel “Chris” Welch, D-Hillside, called the revised outlook “proof we can support families, invest in underserved communities, and be fiscally prudent at the same time,” while Comptroller Susana Mendoza said the move “vindicates” her office’s effort to pay down the state’s bill backlog.
“My administration has been committed and vocal about the need to show fiscal discipline and accountability,” Mendoza said in a statement. “Fitch notes the responsible approach we have taken with the General Assembly and the Governor’s office to target better-than-expected revenues to paying down debt.”
In its announcement, Fitch listed a number of things Illinois could do that might lead to a credit upgrade. Those include continuing to pay down the bill backlog, continuing the recent pattern of passing balanced budgets on time and narrowing what Fitch called a “structural budget gap” by matching recurring revenues with recurring expenses, including funding its pension obligations at actuarially determined levels.
Recent budgets have included the pension payments required by statute that are otherwise short of the actuarially determined payments that would prevent the state’s unfunded liability from increasing. The state’s statutory pension payment, which it made in full for the upcoming fiscal year, was about $9.8 billion, or 23 percent of the state’s General Revenue Fund budget for the year.
However, the agency also noted factors that could lead to a credit downgrade, such as failing to follow through on plans for early retirement of federal pandemic loans and repayment of interfund borrowing, or using one-time federal aid for recurring expenses in the future.
Meanwhile, Fitch said, bonds issued as part of the Rebuild Illinois capital improvements plan continue to be rated BBB+, a slightly higher rating than the state’s general obligation bond rating, because the capital plan bonds are backed by dedicated sources of revenue.
Fitch said it believes those revenue sources, which include motor fuel tax revenue and license plate fees among others, would remain sufficient even in the event of an economic downturn.