Illinois drew a fresh rating upgrade Tuesday for making further progress in tackling its chronic fiscal sore spots.
Moody's Investors Service raised Illinois' general obligation and sales tax-backed Build Illinois bonds by one notch to A3 from Baa1 and assigned a stable outlook. The upgrade also lifts the Metropolitan Pier & Exposition Authority's rating one notch to Baa2 from Baa3.
"Like other states, Illinois enjoyed solid tax revenue growth over the past couple years, expanding its capacity to build financial reserves and increase payments towards outstanding liabilities," Moody's said. "The state is on track to close fiscal 2023 … with further growth in reserves that are already at their strongest level in over a decade. The state is also increasing payments to its pension plans. These latter two points are evidence of improving governance."
The action impacts about $26 billion of GOs, $2 billion of sales tax bonds and $4 billion of appropriation bonds. S&P
Illinois' GOs haven't carried a Moody's rating in the
A burdensome pension tab and the damage a recession could inflict on state coffers still strain the rating that remains the lowest among states. New Jersey, which Moody's raised this year to A2 from A3 and assigned a positive outlook, follows. Illinois and New Jersey are the only two states rated in the single-A category.
Illinois GO paper also trades at the widest spread among states in the secondary market, although the spread on the state's 10-year has shrunk to 153 basis points from a 163 bp spread just ahead of the S&P upgrade. Earlier in the year it was at a 173 bp spread.
Moody's commentary offers Gov. J.B. Pritzker some bragging rights on how the state has managed its surpluses.
The state's governance metric weighed heavily on the action under Moody's environmental, social, and governance framework as it rose to a two ranking from a three as the state.
"Illinois' operating flexibility will remain constrained by certain institutional structures, such as the state's constitutional protection of pension benefits. The state is, however, displaying improved management of its budget by making conservative revenue assumptions and applying surplus revenue towards the payment of debt and growth in reserves," Moody's said.
"We have balanced our budget, paid our bills on time, cleared out decades of debt, made extra pension payments, and saved billions for a rainy day," Pritzker said in a statement. "There's more work to be done."
All told the state expects to have paid off $10 billion of various forms of debt through fiscal 2024 and the reserve is on track to exceed $2 billion in the coming years.
A further boost up Moody's ratings scale requires a heavier lift on reserves and pension funding or economic strengths. "These challenges include heavy long-term liability and fixed cost burdens that constrain the state's financial flexibility and contribute to a weak financial position compared to other states, despite the recent improvement in fund balance," Moody's said.
The state's economy has grown at a slower clip than most others, given a weak population trend leaving the state more vulnerable to balance-sheet damage in a recession. The
The Build Illinois bonds carry the same rating as the GOs due to a lack of legal and physical separation of the pledged tax revenue from the state's general financial activities. MetPier's appropriation-supported bonds bear a two-notch distinction due to the less essential nature of the convention center.
State Comptroller Susana Mendoza used the report to promote passage of legislation she is championing that "will enshrine these responsible budgeting practices of requiring regular payments into the Rainy Day Fund and the Pension Stabilization Fund, leading to even more upgrades," she said in statement.
Illinois is home to about 12.8 million residents, making it the sixth-largest state by population. It has the fifth-largest economy among U.S. states with an estimated gross domestic product of about $1 trillion, Moody's said.
