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Gov. Pritzker can breathe a little easier after S&P report

Thursday, Mar 14, 2019

* It appears the governor’s Monday meeting with the credit ratings agencies went OK. From S&P Global…

The stable outlook reflects our view that Illinois’ likelihood of experiencing a liquidity crisis in the near term has subsided and therefore, so have the odds of its rating falling below investment grade.

So, no junk bond status anytime soon. At least not from S&P.

* Back to the report…

Outlook

Despite the current bill backlog and estimated deficit to end fiscal 2019, we anticipate that the state will retain sufficient cash flow to provide coverage of all core payments. In our view, the proposed seven-year extension of the pension plans’ amortization alone weakens the state’s pension funding. However, it remains possible that an asset transfer or passage of an income tax increase within the outlook horizon could offset what we would otherwise view as weak budgetary practices proposed in the fiscal 2020 budget. Additionally, we do not expect see a re-emergence of heightened political dysfunction but rather anticipate that the budget process will be more timely and constructive. The state’s strong bond payment provisions also offer some downside insulation to the state ratings. The current GO rating incorporates our view of the state’s longer-term vulnerabilities and remains the lowest possible rating within the investment-grade categories.

We’re just one notch above junk.

* With that in mind…

Illinois’ liquidity position is paramount to the rating. Downward rating pressure would likely ensue if Illinois’ bill backlog continues to climb or its liquidity position weakens to a level that jeopardizes its ability to timely finance core government services. Particularly given the state’s high fixed costs, depleted reserves, and prioritization of government services, we believe it has minimal cushion to weather a recession or other unrealized budget assumptions. If unaddressed, we expect that wider-than-currently forecasted budget gaps would likely exacerbate the state’s already strained liquidity. Given its tenuous fiscal position, near-term progress toward resolving its ongoing structural imbalance is critical to maintaining our investment-grade rating. If Illinois is unwilling or unable to pass a revenue increase within the next two years, absent significant expenditures cuts, we would likely lower the rating. Other key sources of potential downward rating pressure include further measures to reduce annual pension contributions, recognition of asset transfers in a way that undermines pension funding, and substantial growth in the state’s debt burden.

* Overall, though, if we’re all good little boys and girls, we may even see an increase in our credit score…

That said, Illinois’ credit rating is uncommonly low among the states, reflecting a confluence of its daunting long-term liability profile and persistent crisis-like budget environment in recent years. Any upside to its credit quality, however, remains constrained by its poorly funded pension systems and other outsized liabilities. But even with these, the state’s economic base could support a higher rating pending improvement in its fiscal operations and overall budget management.

If Illinois were to make sustainable progress toward structural balance, reducing its bill backlog, and growing reserves, we could raise the rating.

Discuss.

- Posted by Rich Miller        

19 Comments
  1. - Norseman - Thursday, Mar 14, 19 @ 4:01 pm:

    In other words, we don’t have a governor anymore who would burn the state down if he didn’t get his way. Nor do we have a GOP presence that enabled that destruction.

    That said, JB needs to work with Cullerton and Madigan to control legislative excess as he works through his plan to stabilize revenue with the progressive income tax.


  2. - DarkDante - Thursday, Mar 14, 19 @ 4:04 pm:

    I’ll take the $870M pension payment reduction, especially considering the non-downgrade from S&P. It’d still personally prefer to see a larger budgetary buffer than the forecasted $155M surplus from Gov. Pritzker’s proposal. While I personally agree with most of his priorities (increased MAP and university funding, an additional $25M juice for K-12), I think he presents an overly rosy picture of both standard growth and incremental funding. IM(H)o: Pritzker should jettison most of this additional spending in order to target the bill backlog.


  3. - Lucky Pierre - Thursday, Mar 14, 19 @ 4:09 pm:

    Should be required reading for anyone expecting a pay raise or an increase in funding from the state


  4. - Grandson of Man - Thursday, Mar 14, 19 @ 4:13 pm:

    Well, ILGOP, isn’t this what the “party of fiscal responsibility” wants, a better financial outlook? A graduated income tax would improve our fiscal future while taking some pressure off of many of us through tax cuts.

    It seems that graduated income tax opponents haven’t learned anything after the former governor’s disastrous budget sabotage. The former governor was very fortunate that his own party bailed him out. His 2017 budget/revenue vetoes are statements that he was willing to let the state go into junk status and a catastrophic three years without a budget. He was craven—privately wanting revenue and a budget but forcing others to go in harm’s way and do overrides.


  5. - A Jack - Thursday, Mar 14, 19 @ 4:22 pm:

    Hopefully we can even get the rating back to pre-Rauner levels. Quinn ratings weren’t great either, but would save taxpayers a little bit on bond interest.


  6. - JS Mill - Thursday, Mar 14, 19 @ 4:34 pm:

    I cannot disagree with much of what they said as far as the financial status and the outlook for Illinois. That said it grieves me to no end how S&P and other rating houses basically gave AAA to a bag of dog dodo for the right payment, and helped with the 2008 financial crisis. I really don’t want to care what they say since Illinois has never defaulted on a payment, but I have to care because it directly increases the cost of borrowing.


  7. - Jibba - Thursday, Mar 14, 19 @ 5:04 pm:

    Credit agencies to Illinois: raise revenue to eliminate structural deficit and debt. No mention of a death spiral.

    Any questions?


  8. - Been There - Thursday, Mar 14, 19 @ 5:20 pm:

    Hard to believe we are still on the edge we never fell over it even when we didn’t have a budget and didn’t pay bills. But now we have a more stable, revenue stream and we are basically rated the same as we were.
    I get that we still need more revenue but we are no where near in bad of shape.


  9. - City Zen - Thursday, Mar 14, 19 @ 5:21 pm:

    We all know how this will play out: The ratings agencies will like the tax hike initially, then will lower our rating with some wording around the tax base being able to absorb the tax hike.

    Damned if you do…


  10. - Anonymous - Thursday, Mar 14, 19 @ 5:35 pm:

    My expectations of this Governor, for his early term, is for stabilization. His strategy is sound.


  11. - Blue Dog Dem - Thursday, Mar 14, 19 @ 5:57 pm:

    Well done Gov. Kick the Can.


  12. - Rabid - Thursday, Mar 14, 19 @ 6:20 pm:

    …crisis in the near term has subsided…Additionally, we do not expect a re-emergence of heighten political dysfunction” govenor junks turnaround agenda is his legacy


  13. - Generic Drone - Thursday, Mar 14, 19 @ 6:32 pm:

    Time to stop the bleeding and make payments to bill backlog.


  14. - wordslinger - Thursday, Mar 14, 19 @ 11:05 pm:

    Oh go (your choice of shocking, unnatural verb) yourself.

    At a rolling doughnut.

    Sideways.

    Back in the day, the great Illinois Blago/Jones/Madigan crew had a AAA rating.

    So did Enron.

    So did sub-prime MBS.

    Rating agencies are excellent when it comes to analyzing and comparing fiscal practices.

    But their ratings mean oogats as to ability to pay — which, is what we’re paying for.

    As any screwball can tell you who can count to 20 by taking off their shoes, or to 21 by pulling down their drawers, the State of Illinois is AAA, by law, by practice and by history. So is every other state.

    There’s not a chance, ever, that the State of Illinois will be late or short on a GO bond payment, ever.

    For crying out loud, in two years, Rauner piled on $12 billion in unpaid bills.

    Bondholders got paid first, on time, in full.


  15. - Stuntman Bob's Brother - Friday, Mar 15, 19 @ 1:05 am:

    Governor “One-Notch-Above-Junk”?
    Guess it beats at least one of the alternatives. All the more reason significant portions of any increased revenue has to be spent at least paying down the backlog, if not paying off bonds with the highest interest rate and/or building up a rainy-day fund. Why wait for the next recession (and we all know it’s coming eventually) to create an emergency?


  16. - SSL - Friday, Mar 15, 19 @ 4:49 am:

    It’s certainly preferable to see comments of stabilization as opposed to junk bond status. Since the state has a $3B budget deficit and the progressive tax won’t start rolling in for awhile, I don’t know where the short term comfort level comes from though. Won’t the bill backlog keep growing? Still a lot of unknowns in how all this comes together. Hopefully when the next economic slowdown comes, it isn’t too severe.


  17. - lake county democrat - Friday, Mar 15, 19 @ 8:15 am:

    –Particularly given the state’s high fixed costs, depleted reserves, and prioritization of government services, we believe it has minimal cushion to weather a recession or other unrealized budget assumptions.–

    Well that should be a relief to those of us urging some spending cuts along with progressive tax increases - what are the odds of a recession anytime soon? http://fortune.com/2018/11/21/us-economy-slow-2019-recession-2020-economist-forecast/


  18. - PublicServant - Friday, Mar 15, 19 @ 9:04 am:

    So, you’re urging unspecified spending cuts. How helpful.


  19. - lake county democrat - Friday, Mar 15, 19 @ 12:41 pm:

    PublicServant - in-part. I’ve proposed a default sequester exempting certain programs (and education in general). The agencies know how to cut with the least amount of pain - voters aren’t omniscient.


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