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.