You cannot on the one hand constantly harp about decades of Illinois credit rating downgrades and then blithely dismiss the first bit of good Illinois rating news since George Ryan was governor.
It’s OK to step away from the “Illinois is awful” screaming for a moment in the wake of last week’s upgrade of Illinois’ bond rating by Moody’s Investors Service. While not the end of our problems by any means, this signals yet another important fiscal turning point.
Illinois’ long credit ratings slide began in May of 2003, when both Moody’s and Fitch dinged the state’s grade. The last upgrade the state was granted before last week’s action was 21 years ago, in June of 2000. The last time Moody’s upgraded Illinois’ rating was June of 1998. House Speaker Chris Welch had just barely graduated law school at the time.
The state’s credit rating was downgraded a total of 24 times starting in 2003. Eight of those downgrades, a third, came during just 20 months of former Gov. Bruce Rauner’s fiscally catastrophic administration. To say he had an outsized impact would be putting it mildly.
The climb back began in 2017, when some Republicans joined Democrats to pass an income tax hike over Rauner’s veto. It was a turning point. The downgrades all but stopped.
Just remember those above two paragraphs when Rauner’s impasse cheerleaders try to dismiss this Moody’s upgrade. We’d be in a far worse spot right now had they and Rauner won.
And, yes, of course the federal government has played a huge role in Illinois’ fiscal rebound over the past year or so. It has repeatedly pumped up the economy, which unexpectedly boosted Illinois’ coffers to the point where it didn’t need to use federal funds to patch its budget holes or tap federal aid to pay back federal borrowing.
The state did so well that it ended the fiscal year, which concluded on June 30, with an expected $2 billion surplus. That surplus will allow it to pay off $2 billion in pandemic-related borrowing this fiscal year.
According to the Committee for a Responsible Federal Budget, Congress has committed $126 billion to Illinois, mostly to the private sector, with about a third of the total in loans.
The airline industry in Illinois alone will receive almost $16 billion, about twice what the state government received this spring from the American Rescue Plan Act.
But it’s not like Illinois got a special deal out of Uncle Sam. The aid has been distributed fairly evenly among the states. California ended its fiscal year with an $80 billion surplus.
Prudently, most of that $8.127 billion in federal money for Illinois’ government hasn’t been appropriated. $1 billion was spent on one-time capital appropriations and $1.8 billion was spent on mostly one-time grants or temporary aid allowed by the federal government.
That leaves more than $5.3 billion in reserve. The hope in many states is that the federal government will wipe out their huge unemployment insurance trust fund debts. If not, some of that $5.3 billion might be used here to cover some of Illinois’ hole, sparing employers a gigantic tax hike.
Senate Appropriations Committee Chair Elgie Sims has been telling me for weeks that he was confident the new state budget would result in a credit rating upgrade.
Sims is not only a budget expert (joining the Senate’s budget staff after graduating from college in 1993), but he’s also a bond lawyer. He knows what the industry is looking for, and he and many others did what they could to deliberately produce a well-received budget.
Illinois has been one step away from junk bond territory since the Rauner days, so, no matter what you think of the New York rating agencies, the urgent importance of upgrades cannot be overstated.
“We stayed the course, we did not do anything irresponsible with that federal money, we paid down all that debt,” which Sims said is exactly what the ratings agencies wanted to see.
Rating agencies also prefer sustainable state revenues. The new budget permanently closes $655 million in corporate tax “loopholes,” as the governor calls them. Gov. J.B. Pritzker noted last week the move helps permanently pare down the state’s still-large structural deficit, which passing the progressive income tax last year could’ve all but eliminated.
Obviously, this federal boost won’t last. And Moody’s warned that pension and other state obligations “could exert growing pressure as the impact of federal support dissipates, barring significant revenue increases or other fiscal changes.”
But now they have some time to tackle the problems.
Reaction has spanned the spectrum with market participants mostly saying it was deserved given the state’s fiscal progress and its COVID-19 pandemic recovery. Some said the upgrade was expected, a reason for the state’s narrowing spreads over the past few months. But they are quick to underline that’s the near-term view and chronic pension strains, past decisions that favored one-shots, an ongoing structural imbalance and out-migration weigh heavily on the state’s fiscal foundation.
“I think it’s important to bear in the mind Illinois is still the lowest-rated state” and “no one has waived a wand” and erased the state’s high liabilities, governances challenges and financial operating difficulties, Moody’s lead analyst Ted Hampton said in an interview last week. “But I think what’s going on now really represents the first very strong positive movement — positive enough to warrant an upgrade. It is to some extent a turning of the tide but the state still has a long way to go to look like the bulk of other states.” […]
Illinois should see some direct benefit when it next enters the market by drawing a broader base of buyers as some can’t purchase bonds at the Baa3 level and could help some hold on to the bonds. “To the extent that some buyers have an incrementally higher floor of credit quality” the state could draw more interest, Mousseau said.
“I think that the Moody’s upgrade will help the state GO and other related credits get better pricing when they next sell bonds,” said John Ceffalio, senior municipal research analyst at CreditSights Inc. “If Illinois continues on this credit path, which I expect, then it will lead to further positive ratings actions during fiscal 2022.”
