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S&P revises Illinois outlook from negative to stable based on cuts, proposed budget and “dissipated” political gridlock

Tuesday, Mar 9, 2021

* S&P…

S&P Global Ratings revised the outlook to stable from negative and affirmed its ‘BBB-’ long-term rating on the State of Illinois’ general obligation (GO) debt outstanding, its ‘BB+’ rating on the state’s appropriation-backed debt, and its ‘BB-’ rating on the state’s moral obligation debt. At the same time, S&P Global Ratings assigned its ‘BBB-’ long-term rating to Illinois’ $1.259 billion GO bonds series A-C of March 2021.

In addition, we revised the outlook to stable from negative and affirmed our long-term ratings on various revenue bonds, including Build Illinois and the Metropolitan Pier & Exposition Authority bonds, rated under our “Priority-Lien Tax Revenue Debt” criteria (published Oct. 22, 2018), which factors in both the strength and stability of the pledged revenues, as well as the general creditworthiness of the linked obligor, in this case the State of Illinois (GO rating). The priority-lien rating on these bonds is limited by the state’s general creditworthiness.

“The revised outlook reflects the waning of fiscal and economic uncertainty stemming from the COVID-19 pandemic and subsequent economic downturn,” said S&P Global Ratings credit analyst Geoff Buswick.

When we revised the outlook to negative from stable one year ago, we viewed the state’s lack of a reserve fund, history of liquidity challenges, and very high fixed costs as potentially limiting flexibility in addressing the economic and budget demands stemming from the pandemic. However, the administration has had adequate controls to maintain liquidity (including accessing the municipal liquidity facility), revenues for the most part have been stronger than forecast, and expenditure cuts or freezes have provided budgetary flexibility. Because the outlook revision is directly related to COVID-19 and the state’s budgetary actions during the pandemic, we view this as a remaining, but lessening, social risk in our environmental, social, and governance factors. Credit risks remain and the ‘BBB-’ rating is appropriate, in our view, but the economic conditions, federal support, and administrative actions have pulled the rating away from the speculative-grade category and support the stable outlook.

Credit weaknesses supporting the ‘BBB-’ rating include:

    • An empty budget stabilization fund that would further limit budgetary flexibility;
    • The remaining still-sizable bill backlog;
    • Pension funding practices where the statutory pension funding is designed to attain a 90% funded status in 2045, which is one of the least conservative funding methodologies in the nation among peers;
    • A recurring practice of relatively late audit reports. The audit for the fiscal year ended June 2019 was not released until April 2020 and the fiscal 2020 audit is still not published; and
    • The unknown pace of recovery out of the pandemic-induced downturn.

Credit strengths include:

    • On the revenue side of the budget, various tax revenues have held up stronger than forecast during the depths of the economic trough, and the likely receipt of unbudgeted federal stimulus to help bridge the gap to a fully functioning economy;
    • On the expenditure side of the budget, whereas in the recent past the state has hesitated to make expenditure cuts during times of fiscal stress, the administration made more than $700 million in budget cuts and freezes in fiscal 2021 during the budget year, and the proposed fiscal 2022 budget includes another $1.269 billion in modifications and freezes. Not all cuts and freezes were general fund-related, but the recurring actions indicate a potential change in practice;
    • Additional federal stimulus is not required in the governor’s budget proposal and any form of further aid would likely have a positive fiscal and economic effect; and
    • The political gridlock that stymied governance a few fiscal years ago has dissipated.

The rating also reflects our opinion of governance risks that we view as being above the sector norms due to the constitutional limits the state faces to modify its rising pension costs, and that the state is not contributing to meet static funding, limiting current and future budgetary flexibility. However, we view the state’s environmental risks as in line with our view of the sector. Our outlook revision also reflects our view that the COVID-19 pandemic’s impact on the state’s economy, budget, and forecast is a social rating factor elevating the public health and safety issues.

We could lower the rating if we believe Illinois’s bill backlog is climbing meaningfully or the state’s liquidity position weakens to a level that jeopardizes its ability to finance core government services in a timely manner. Given the state’s high fixed costs, particularly pension and other postemployment benefits, and a lack of reserves, we believe that if Illinois does not address these conditions, downward pressures will return. Given the state’s recent tenuous fiscal position, near-term progress toward resolving the ongoing structural imbalance and realizing budgetary control targets is critical to maintaining an investment-grade rating.

Any upside to the state’s creditworthiness, however, remains somewhat constrained by the poorly funded pension systems and other outsize liabilities. But even with these, the state’s economic base could support a higher rating pending improvement in fiscal operations and overall budget management. If Illinois were to make sustainable progress toward structural balance, including meeting its pension obligations, further reducing its bill backlog, and increasing reserves, we could raise the rating.

I can’t remember the last time a ratings agency hinted at an improved Illinois credit score.

- Posted by Rich Miller        

23 Comments
  1. - North Park - Tuesday, Mar 9, 21 @ 2:07 pm:

    It’s such a beautiful day, don’t make Jim Tobin cry.


  2. - Norseman - Tuesday, Mar 9, 21 @ 2:10 pm:

    === The political gridlock that stymied governance a few fiscal years ago has dissipated. ===

    Yes it has. The GQP has proven to be incapable of governance. While things aren’t perfect, IL still need Dem leadership.


  3. - TheInvisibleMan - Tuesday, Mar 9, 21 @ 2:15 pm:

    Moodys throwing S&P under the bus is glorious.

    I look forward to seeing a writeup on this in that one site named after pointy wires.


  4. - TheInvisibleMan - Tuesday, Mar 9, 21 @ 2:17 pm:

    Oops. reverse that. S&P throwing Moodys under the bus is what I meant to write.


  5. - Grandson of Man - Tuesday, Mar 9, 21 @ 2:20 pm:

    “the likely receipt of unbudgeted federal stimulus to help bridge the gap to a fully functioning economy”

    State and local government officials should be glad throughout the state and regardless of party affiliation. Who really wants to slash government services and employees in their districts, towns, counties? It’s easy to say “cut spending,” but when cuts are very real, who truly embraces them? We saw how some ILGOP had enough of the former governor’s budget sabotage and voted to protect their constituents from further harm. Let’s leave the talking points to the usual spouters and gladly take the money.


  6. - Third Reading - Tuesday, Mar 9, 21 @ 2:22 pm:

    Ratings agencies like boring.


  7. - Blake - Tuesday, Mar 9, 21 @ 2:25 pm:

    ===Pension funding practices where the statutory pension funding is designed to attain a 90% funded status in 2045, which is one of the least conservative funding methodologies in the nation among peers===
    I wonder it would take to get this to stop being a point against Illinois? 100% by 2045, 90% by 2040?


  8. - Anyone Remember - Tuesday, Mar 9, 21 @ 2:29 pm:

    “• A recurring practice of relatively late audit reports.”

    [Wonky font on] Any indications when the June 30, 2020 audit will be released? [Wonky font off]

    Thought the financial ERP selected by DoIT guaranteed on-time audit reports. /S


  9. - Ducky LaMoore - Tuesday, Mar 9, 21 @ 2:34 pm:

    “I can’t remember the last time a ratings agency hinted at an improved Illinois credit score.”

    It happened once during the Quinn administration after the initial tax hike. Before that, it was probably sometime during the Edgar administration.


  10. - dan l - Tuesday, Mar 9, 21 @ 2:38 pm:

    Weird. I thought everything here was terrible and the sky was falling.


  11. - Roman - Tuesday, Mar 9, 21 @ 2:44 pm:

    == It’s such a beautiful day, don’t make Jim Tobin cry. ==

    And I just heard they’re hanging dark bunting outside the Tribune editorial board office.


  12. - Put the fun in unfunded - Tuesday, Mar 9, 21 @ 2:48 pm:

    See, didn’t need the progressive tax amendment after all.


  13. - Simple Simon - Tuesday, Mar 9, 21 @ 2:56 pm:

    ===didn’t need the progressive tax amendment after all.===

    You must have missed all the talk of structural imbalances and underfunded pensions. The silver lining mentioned is pretty darn small.


  14. - Oswego Willy - Tuesday, Mar 9, 21 @ 2:59 pm:

    (Insert brilliant - Wordslinger - takedown on constitution, pension payments, and the gaming of the ratings)

    I also remember Rauner saying ratings were important than they weren’t important.

    So there’s that.

    It hurts Illinois when the focus isn’t on the actual but the proverbial want to downgrade


  15. - JS Mill - Tuesday, Mar 9, 21 @ 3:06 pm:

    The fact remains the Illinois GO Bonds should receive nothing lower than a “AAA” rating. They are guaranteed, never missed a payment.

    What S&P and Moody’s do not tell you is that investors LOVE Illinois bonds. Due to the lousy (fake) rating they pay the best. They sell out fast because everyone knows they will get paid.


  16. - City Zen - Tuesday, Mar 9, 21 @ 3:26 pm:

    ==A recurring practice of relatively late audit reports.==

    Are we still blaming this on Bruce?


  17. - Oswego Willy - Tuesday, Mar 9, 21 @ 3:38 pm:

    === Are we still blaming this on Bruce?===

    Rauner said ratings were important than they weren’t important.

    Keep up please


  18. - Candy Dogood - Tuesday, Mar 9, 21 @ 3:47 pm:

    Meanwhile all this time there’s been no change to the actual risk of Illinois defaulting on general obligation bonds. It’s almost as if none of their analysis really matters, but we pay out more in interest because of their racket.


  19. - Da Big Bad Wolf - Tuesday, Mar 9, 21 @ 4:10 pm:

    === racket.===
    Yes it is.


  20. - City Zen - Tuesday, Mar 9, 21 @ 4:12 pm:

    ==Rauner said ratings were important than they weren’t important.==

    I specifically referenced “late audit reports.” From Comptroller Mendoza in June 2019:

    “It appears there are issues from this audit period dating from the previous administration’s management.”

    My question remains. In 2021, are we still blaming Bruce?

    Keep up, please.


  21. - Oswego Willy - Tuesday, Mar 9, 21 @ 4:14 pm:

    === It appears there are issues from this audit period dating from the previous administration’s management.”

    My question remains. In 2021, are we still blaming Bruce?

    Keep up, please.===

    This only makes sense if you think the audits were fine.

    See how that works?


  22. - Original Rambler - Tuesday, Mar 9, 21 @ 4:42 pm:

    CZ, BR was the father of SAP.


  23. - Chicago 20 - Wednesday, Mar 10, 21 @ 5:30 am:

    On the MPEA bond debt.
    Adding the 2020 principal of $91,045,000 and interest of $119,987,000 equals a total of $211,032,000.

    Yet the MPEA only has $158,451,448 of Authority Tax collections.

    Then the payment schedule ramps up to $245,873,000 in 2021, $259,874,000 in 2022, $274,869,000 in 2023, $274,877,000 in 2024 and then $292,711,000 in 2025.

    Eventually the scheduled payments ramp up to $347,244,667.

    Still the MPEA only has $158,451,448 of Authority Tax collections. Even if Authority Tax Collections doubled the MPEA would be short.

    Hundreds of millions of State sales tax revenues will then be used to pay the MPEA bond debt.


Sorry, comments for this post are now closed.


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