Moody’s Investors Service raised Illinois’ general obligation rating one notch Thursday, the state’s first rating reward after passing a budget directing
The upgrade to Baa1 from Baa2 followed Moody’s action last June raising the rating by one notch which turned the rating tide for a state stung by more than a decade of downgrades that left it one cut away from a speculative grade. S&P Global Ratings followed with an upgrade in July that moved the rating to BBB from BBB-minus, the state’s first S&P upgrade in 24 years. S&P now has a positive outlook.
Fitch Ratings left the rating at BBB-minus last year but assigns a positive outlook and has signaled the potential for a multi-notch upgrades after it reviews the fiscal 2023 budget signed by Gov. J.B. Pritzker this week. Some of the fiscal actions citied by Moody's were also taken by lawmakers in revisions to the fiscal 2022 budget.
The upgrade “reflects the state's solid tax revenue growth over the past year, which expanded its capacity to rebuild financial reserves and increase payments towards unfunded liabilities,” Moody’s said in the report. “The state is on track to close the current fiscal 2022 with its strongest fund balance in over a decade,” and that’s after paying off early all of its borrowing through the Federal Reserve's Municipal Liquidity Facility and chipping away at its accounts payable log.
“The state is also increasing pension contributions, indicating increased commitment to paying its single-largest long-term liability,” Moody’s said. “The rating balances the state's recent financial progress with underlying challenges that will remain in place for some time.”
The balance sheet strains from a burdensome unfunded pension tab of $139.9 billion and other fixed costs will persist and pose longer term pressures that hurt future flexibility when compared to other states and that’s despite the current progress. Illinois’ economic growth rate also has long lagged other states and that’s expect to persist given the state’s trend of population losses.
Illinois carries the lowest rating among states and pays the steepest yield penalties but the state’s trajectory remains on the upswing for now and budget watchdogs that endorsed the fiscal 2023 budget and now Moody’s have heaped praise on the state’s decisions to use a portion of surpluses for pensions, the rainy day fund and to pay down bills.
GOP critics and some buy side players to those longer term strains and the state’s lack of structural reforms on revenue projections and spending as worrisome once a federal relief-fueled economic expansion slows. The state received $8 billion from the American Rescue Plan Act last year.
The state also faces a harder road getting up to the single-A category. “The stable outlook balances the financial progress being made by the state with the uncertainty of the present economic climate,” Moody’s said. “The state's lean financial reserves, and heavy long-term liability and fixed cost burdens make it more vulnerable than other states to a negative shift in the national or global economy, which presently limits the probability of further rating improvement.”
Pritzker, his fellow Democrats who hold a legislative majority and face a June primary and November general election basked in the rating upgrade.
"Fiscal responsibility is paying off," Pritzker said at a news conference Thursday after Moody's published the upgrade report. "There’s more work to be done, but step by step, rung by rung, we are steadily climbing the ladder out of a hole that was dug over decades."
Illinois’ ratings sunk to near-junk during two years without an enacted state budget impasse as the legislature's majority Democrats butted heads with then Gov. Bruce Rauner, a Republican. It ended in 2017 when several GOP members joined Democrats in passing a budget with an income tax hike. Rauner lost to Pritzker in the 2018 election.
The Moody’s upgrade also moves the state’s sales-tax backed Build Illinois bonds to Baa1 from Baa2. Moody’s affirmed the Baa3 rating on outstanding Metropolitan Pier & Exposition Authority bonds that are partially paid with state appropriations. The two-notch differential reflects the moderate legal framework associated with the bonds and the less essential nature of the financed convention center. Moody's retained its stable outlook on all the ratings.
Illinois Comptroller Susana Mendoza announced Thursday that several of the first steps approved by lawmakers were being completed Thursday with a transfer of $400 million transfer by her office into the rainy day fund and $300 million being deposited in the pension stabilization fund that will go to pay down pension liabilities.
The fiscal $46.5 billion fiscal 2023 budget that beings July 1 and revisions to the 2022 budget funnel $1 billion to depleted reserves, bolster scheduled pension contributions by $500 million and pay down nearly $1 billion of outstanding bills.
The budget deal struck by Democrats also provides mostly one-time tax relief of $1.8 billion. The state previously said it expected an additional $2.2 billion of revenue in fiscal 2022 and another $2 billion in fiscal 2023 from previous predictions and more recently raised those estimates by another $2 billion.
Illinois’ one, 10, and 25-year bonds were trading this week at a 118/125 basis point spread to the Municipal Market Data’s AAA benchmark. That’s up from 57/96/99 spreads at the start of March and 24/63/66 at the start of the year amid market turmoil that hits lower-rated credits the hardest.
Before the June upgrade, Moody’s had last moved the state's rating upward in 2010, a two-notch move Aa3 driven by a
Illinois’ investment grade status was initially threatened by the COVID-19 pandemic. In the spring of 2020 Fitch cut its rating one notch to BBB-minus; all three agencies moved their outlooks to negative due to pandemic pressures. Moody’s and S&P moved the outlook back to stable in the spring before upgraded the state later in the year while Fitch
