* Fitch…

Factors that could, individually or collectively, lead to negative rating action/downgrade:

–Fitch anticipates Illinois will actively manage fiscal challenges in the near term with nonrecurring measures such as growth in accounts payable. A downgrade could be triggered by the lack of a credible path to reversing those measures quickly, once an economic recovery finally takes hold, or by a reliance on short-term measures that materially compound the state’s long-term challenges such as its pension liability burden. Specifically, Fitch will assess the implications of the graduated income tax vote, the likelihood of additional federal aid that could mitigate the state’s fiscal challenges and the effectiveness of the budget reduction plans the governor has directed state agencies to develop for the current and next fiscal years.

–A return to economic contraction in the U.S., consistent with Fitch’s coronavirus downside scenario, which could trigger greater than anticipated, sustained and deep revenue declines and materially erodes the state’s gap-closing capacity. Fitch’s assessment of the state’s long-term economic growth prospects could also be fundamentally weakened from an already modest level. This would pressure all aspects of the state’s credit profile. […]

Illinois has managed short-term liquidity pressure with no interruption in timely payments for key operating expenses, including debt service, and Fitch anticipates that will remain the case. […]

As Fitch anticipated, with additional federal aid having yet to materialize, the state is revisiting its spending plan and not relying simply on the non-recurring measures noted above. In September, the Governor directed state agencies to develop budget contingencies that could reduce fiscal 2021 spending at least 5% from appropriated levels. GOMB will assess agency plans before estimating the savings that could be generated from the reductions (some of which may require legislative action in a November session to be effective). Further, the governor directed agencies to prepare for deeper reductions of 10% in fiscal 2022. Even with such reductions, Fitch anticipates the state still will likely need to take substantial additional budget actions beyond this fiscal year.

The November election will have direct fiscal consequences given the vote on the graduated income tax amendment (estimated to generate $1.3 billion in additional revenue in fiscal 2021 and roughly double that in future full fiscal years, if approved), and indirect consequences if changes at the federal level alter the likelihood of additional federal aid. Illinois’ legislative session after the November elections could be particularly consequential this fiscal year. […]

In Fitch’s coronavirus baseline and downside scenarios, the [Fitch Analytical Stress Test] model indicates Illinois’ revenue decline could be among the most severe for U.S. states over the three-year scenario period, as Fitch anticipates the state’s tax revenues will rebound more slowly than in most other states. This will likely constrain Illinois’ ability to restore its limited financial resilience. In the current baseline scenario Illinois’ revenues decline 15% in year one, followed by a 6% increase in year two and cumulative result over the three-year scenario of a 8% decline. This compares with the state median decline of 14% in the first year and negative 3% over the three-year scenario. In the downside scenario, Illinois’ first-year decline would be 16%, followed by a further 5% decline in the second year. The cumulative three-year decline of 17% under Fitch’s downside scenario is weaker than the median 12% decline for all states reflecting the state’s greater historical susceptibility to national economic downturns and more muted recovery during expansions. Fitch anticipates this higher downside scenario exposure could make it even more difficult for the state to maintain an investment-grade credit profile.

Illinois’ budget management during the long period of economic expansion preceding the pandemic was exceptionally weak. Recent revenue gains stabilized the state’s credit profile over the near term, but long-term trends remain a significant credit concern.

Discuss.