* Background is here if you need it. This means all three rating agencies have now upgraded the state’s grade. Moody’s has upgraded the state twice in less than a year. Fitch…

Fitch Ratings has assigned a ‘BBB+’ rating to the following State of Illinois’ GO bonds:

–$925 million series of June 2022A;

–Up to -$900 million refunding series of June 2022B.

Additionally, Fitch has also upgraded the following state of Illinois ratings:

–Issuer Default Rating (IDR) to ‘BBB+’ from ‘BBB-’:

–GO bonds to ‘BBB+’ from ‘BBB-’;

–Build Illinois senior and junior obligation sales tax revenue bonds, which are linked to the state’s IDR based on state-dedicated tax analysis, to ‘A’ from ‘BBB+’;

The Rating Outlook is Stable. […]

ANALYTICAL CONCLUSION

The upgrade to ‘BBB+’ reflects fundamental improvements in Illinois’ fiscal resilience including full unwinding of pandemic-era and certain pre-pandemic non-recurring fiscal measures, meaningful contributions to reserves and sustained evidence of more normal fiscal decision-making. The ‘BBB+’ IDR also reflects the state’s elevated long-term liability position and resulting spending pressure, as well as a long record of structural imbalance primarily related to pension underfunding. Illinois’ deep and diverse economy is only slowly growing, but still provides a strong fundamental context for its credit profile.

DEDICATED TAX ANALYTICAL CONCLUSION

The Build Illinois bonds’ ‘A’ ratings reflect Fitch’s view that pledged state sales tax deposits will grow with inflation. The security structures can withstand a substantial level of decline and still maintain sum-sufficient debt service coverage. However, Fitch caps the ratings on the Build Illinois bonds at two notches above the state’s ‘BBB+’ IDR based on our assessment of security-specific considerations. This is below our assessment of the underlying credit quality of the dedicated tax bonds.

Economic Resource Base

Illinois’ economy is centered on the Chicago metropolitan area, which is the nation’s third largest and a nationally important business and transportation center. The state’s GDP ranks fifth largest amongst all U.S. states. Economic growth lags that of the U.S. as a whole with population stagnation and relative labor market weakness.

KEY RATING DRIVERS

Revenue Framework: ‘aa’

Over the long term, Fitch expects Illinois’ broad revenue base, primarily income and sales taxes, to capture the breadth of its economy and to track its slow growth trajectory. Illinois has unlimited legal ability to raise revenues.

Expenditure Framework: ‘a’

Illinois has adequate expenditure flexibility, with some of the broad expense-cutting ability common to most U.S. states. The natural pace of spending growth will likely outpace revenue growth, requiring ongoing and active budget management. Carrying costs are higher than all other states and contribution demands for retiree benefits will continue to be a particular pressure point as these benefits are constitutionally protected.

Long-Term Liability Burden: ‘a’

Long-term liabilities are an elevated but still moderate burden on Illinois’ significant resource base. Constitutional limitations suggest Illinois has very limited flexibility to modify existing pension and other post-employment benefit (OPEB) obligations.

Operating Performance: ‘bbb’

Illinois’ operating performance has improved but remains weaker than other U.S. states. Steady reduction in accounts payable, retirement of outstanding budgetary liabilities and smoother fiscal decision-making have become sustainable. Sizable gaps in pension funding and limited resilience to future downturns, despite recent additions to reserves, persist.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

–Sustained progress towards structural balance and improved liability management, primarily through narrowing the wide gap between actual and actuarially determined pension contributions;

–Material improvements in fiscal resilience, primarily through building reserves to, or approaching, double currently forecast levels.

–For the Build Illinois bonds, an upgrade to the state’s IDR.

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

–Reversion to previous pattern of irresolute and contentious fiscal decision-making that could include delayed budgets with unsustainable fiscal measures such as deeper pension funding deferrals or sustained increases to accounts payable or other budgetary liabilities.

–For the Build Illinois bonds, deterioration in the state’s IDR given the linkages, or material weakening of pledged revenue coverage and structural resilience. Fitch considers this unlikely given the limitations on additional debt issuance. […]

CURRENT DEVELOPMENTS

Economic Recovery Picks Up; Continues to Trail National Pace

Illinois’ employment recovery has modestly accelerated in recent months, but overall recovery still lags the national rate. Through March 2022, Fitch’s analysis of BLS data indicates the state had recovered 82% of the jobs lost at the start of the pandemic versus the national recovery rate of 93% through the same period. Over the past six months, Illinois has gained jobs at a faster clip with its recovery rate up more than 18 percentage points (pps) versus 16 pps nationally.

The state’s official March monthly unemployment rate of 4.7% was higher than the national 3.8% rate that month. Illinois’ Fitch-adjusted unemployment rate (which adds back the declines in labor force since February 2020) was higher at 6%, indicating the state has seen material weakening of its labor markets over the course of the pandemic, which could be a factor in Illinois’ slower employment recovery.

Strong Revenue Growth Helps Unwind Nonrecurring Budget Measures

Revenue growth well ahead of budgeted expectations in fiscal year 2021 and 2022 (ending June 30) and prudent expense management allows the state to accelerate repayment of various budgetary liabilities. Revenue performance largely reflected economic activity rebounding much faster than anticipated, with federal economic support playing a key role. Illinois currently estimates fiscal 2022 net individual income tax (IIT) revenues of $22.7 billion will be $1.9 billion higher than the enacted budget, a 9.3% improvement. The estimate for net sales tax revenues similarly forecasts fiscal 2022 growth more than 10% ahead of the enacted budget estimate, by nearly a billion dollars. Corporate income taxes, typically the most volatile and least predictable of the primary tax revenues, is estimated to end $1.6 billion ahead of budget. In total, Illinois currently projects fiscal 2022 state general funds tax revenues will end the year at $41 billion, $4.5 billion above the June 2021 estimate of $36.5 billion.

Recently released April 2022 revenue collections reported by the state legislature’s committee on government forecasting and accountability (CGFA) suggest final fiscal 2022 collections will be even stronger. Through April, a key month for income tax collections, CGFA reports fiscal 2022 state general funds receipts, net of refunds and statutory distributions for income and sales taxes, up more than 16% yoy. CGFA notes several reasons for the sharp increase in April monthly receipts (69.1% yoy) including a change in tax filing deadlines in 2021, which suggests final year results will be somewhat lower than the 16% YTD gains. Through March, CGFA reported a yoy increase of 9.4%.

With operating expenditures generally in line with the enacted budget, the state was able to direct the revenue surplus for the current year towards paying down liabilities including the remainder of its federal Municipal Liquidity Facility (MLF) loans ($1 billion), outstanding interfund borrowings ($929 million - most of which was incurred pre-pandemic) and longstanding unpaid health insurance bills for employee and retiree healthcare ($898 million, also incurred pre-pandemic). Additional measures taken include paydown of a liability for the College Illinois program, a contribution to the state’s budget stabilization fund and primarily one-time tax relief measures as described further below.

The state’s trend in accounts payable has improved for several years, with the pace of repayment accelerating since the start of calendar 2021. As of March 31, 2022, the Comptroller’s Debt Transparency Act (DTA) report indicated an approximately $3.6 billion general funds bill backlog and a 12-month moving average (to adjust for seasonality) of $4 billion. This is down 44% from the pre-pandemic (February 2020) 12-month moving average of $7.1 billion. The March DTA report also notes $48 million in reported pending late payment interest penalties, down 85% from February 2020 ($319 million).

According to the March report, the Office of the Comptroller’s bill payment cycle, or the age of the state’s oldest unpaid general funds voucher for external vendors was 18 business days as of March 31. The Comptroller reports this metric has steadily decreased (aside from seasonal variation) from a peak of 210 days in November 2017.

Enacted Fiscal 2023 Budget Reflects Improved Operating Profile

Illinois’ enacted fiscal 2023 budget, along with supplemental fiscal 2022 budget changes, solidifies the state’s recent financial operating performance improvements but also maintains some fundamental weaknesses. The state expects to end the current year having fully repaid a series of outstanding budgetary liabilities while also making steady progress in reducing its account payables to essentially normal levels with an external vendors bill cycle well below 30 days. The 2022 revised and 2023 enacted budgets also deposit just over $1 billion into the state’s budget stabilization fund (BSF), which had been essentially zeroed out since fiscal 2017. While significantly improved, the planned contributions would leave the BSF at a still modest 2.2% of projected total general funds expenditures in fiscal 2023.

The 2023 enacted budget also includes increases over the current year originally enacted budget in all major spending areas including education ($767 million, with $350 million in evidence-based funding for K-12), human service ($1.3 billion) and healthcare ($552 million). Total general funds expenditures rise $3.7 billion from the enacted fiscal 2022 budget. General funds revenue sources rise $4.1 billion in the 2023 budget, yielding a roughly $440 million surplus, with $312 million allocated towards the BSF. $1.8 billion of tax relief measures in the revised fiscal 2022 and enacted 2023 budgets is concentrated in one-time measures in fiscal 2022, drawing on the large revenue surplus. Only $100 million for an increase to the earned income tax credit is an ongoing tax policy change.

While the fiscal outlook continues to improve, structural gaps remain, primarily underfunding of pension contributions. The 2023 budget fully meets Illinois’ statutory obligations which are based on funding up to target of 90% funding of the state’s pension liabilities by 2045. For fiscal 2023, the CGFA estimates a gap of $4.1 billion (roughly 10% of state sourced general funds revenues) between the statutory state pension contributions of $10.8 billion and the actuarially determined contributions (ADC). The 2022 budget revisions and the 2023 enacted budget includes a total of $500 million in supplemental pension contributions, over the statutorily-defined level, but still well below the actuarial level necessary to fully fund pensions over time.

Measured Initial Use of Federal Aid

Illinois’ plans for spending American Rescue Plan Act (ARPA) state fiscal recovery fund aid is focused on one-time investments rather than recurring operating needs. In the fiscal 2022 budget, the state allocated $2.8 billion of Illinois’ $8.1 billion ARPA state fiscal recovery fund (SFRF) distribution on infrastructure and other one-time, or temporary pandemic-specific needs. Additionally, the state created the Essential Government Services Support Fund (EGSSF) and anticipates flowing $1.5 billion of the ARPA aid through the fund for operating needs. The $1.5 billion is more than offset from a budgetary perspective with repayment of the MLF loan (approximately $1 billion) and interfund borrowing ($928 million), though ARPA aid will not be used for the actual repayments.

In the spring 2022 legislative session, the state also allocated $2.7 billion to repay Illinois’ loan from the federal government’s unemployment trust fund account. Additional one-time uses for healthcare facilities, small businesses and affordable housing essentially round out the state’s use of SFRF aid. Illinois also has access to $254 million from the ARPA’s Coronavirus Capital Projects Fund for infrastructure projects.

Bottom line is Fitch wants the state to stay the course, avoid going back to the endless Blagojevich/Quinn/Rauner (especially) budget wars and double the rainy day fund to $2 billion.

…Adding… Speaker Welch…

Less than a year ago we celebrated Illinois’ first credit rating increase in more than 20 years. Today, we’ve received multiple upgrades from all three credit rating agencies. Thanks to steadfast and responsible budgeting, Democrats continue to improve our state’s fiscal health. More work remains, but we’ve promised to restore financial stability and that’s exactly what we’re delivering.

…Adding… Gov. Pritzker…

Governor JB Pritzker hailed a two-notch bond rating upgrade from Fitch Ratings, Illinois’ fifth notch upwards in less than a year, saying it validated the strong and responsible fiscal management he’s implemented since taking office.

The Fitch upgrade is the first for Illinois’ GO bonds since June 2000 and follows an upgrade by Moody’s Investor Service last month, the second such upgrade by Moody’s in 10 months.

“Balanced budgets four years in a row, paying the state’s bills on time, early repayment of pandemic-related borrowing, clearing out debts left by previous administrations, making higher-than-required pension payments, setting aside $1 billion in savings for a rainy day — this is what responsible fiscal management looks like,” said Governor JB Pritzker. “Working with the General Assembly and my fellow constitutional officers, with dedication and determination we have turned Illinois from a deadbeat state into a fiscally responsible state that is attracting business from around the globe.”

“The upgrade to ‘BBB+’ reflects fundamental improvements in Illinois’ fiscal resilience including full unwinding of pandemic-era and certain pre-pandemic non-recurring fiscal measures, meaningful contributions to reserves and sustained evidence of more normal fiscal decision-making,” the Fitch Ratings release stated, noting a steady reduction in accounts payable and retirement of many of the state’s lingering debts.

In its rating action, Moody’s credited the state’s “solid tax revenue growth over the past year” which expanded the state’s ability to rebuild financial reserves and increase payments toward unfunded liabilities. Moody’s noted Illinois’ progress in repaying its debts and its increased pension contributions as an indication of the state’s increased commitment to paying its pension debt.

The Governor thanked House Speaker Chris Welch, Senate President Don Harmon, Leader Greg Harris, Senator Elgie Sims, Comptroller Susana Mendoza and Treasurer Michael Frerichs for their ongoing commitment to Illinois’ fiscal well-being.

The upgrades follow the enactment of the state’s fourth balanced budget in a row, while providing $1.8 billion in tax relief to the working families of Illinois and marked Illinois’ first contribution to a Rainy-Day Fund in 18 years, as well as a $500 million extra payment toward the state’s pensions. The historic budget places Illinois it its strongest financial position in a generation while funding key investments for education, human services, law enforcement and violence prevention.

Fitch upgraded Illinois’ rating on its General Obligation bonds to BBB+ (stable outlook) from BBB- (positive outlook), and also upgraded Build Illinois sales tax bonds to A (stable outlook) from BBB+ (positive outlook).

Moody’s upgraded Illinois’ rating on its General Obligation bonds to Baa1 stable outlook from Baa2 stable outlook, and also upgraded Build Illinois sales tax bonds to Baa1 from Baa2 while maintaining their stable outlook.

The rating of a state’s bonds is a measure of their credit quality. A higher bond rating generally means the state can borrow at a lower interest rate, saving taxpayers millions of dollars.

Between 2015 and 2017, the State of Illinois suffered eight credit rating downgrades and sat at the top of many analysts’ lists of the worst managed states in the nation. At its worst, Illinois’ bill backlog hit nearly $17 billion.

Key Actions – Responsible Fiscal Management

Fiscally responsible choices over the last three years have resulted in historic progress toward financial stability in Illinois.

Illinois’ FY2023 budget:

• Deposits $1 billion to the Budget Stabilization Fund (BSF) across FY2022 and FY2023 - the first deposits in 18 years. Also creates ongoing, permanent funding for BSF for the first time.
• Contributes an additional $500 million directly towards state unfunded pension liabilities, reducing long-term liabilities by an estimated $1.8 billion.
• Pays down $4 billion in debts across FY2022 and FY2023, including eliminating the payment delays in the employee and retiree health insurance program through $898 million in FY2022 supplemental appropriations.
• Keeps pace with payment of the state’s bills, with estimated bill payment delays at the lowest levels since before the Great Recession, saving taxpayers hundreds of millions in unnecessary interest costs.

…Adding… Comptroller Mendoza…

Today, Fitch Ratings gave the state a two-notch, bond-rating upgrade, noting the state’s “fundamental improvements in Illinois’ fiscal resilience.” This is the first Fitch upgrade for Illinois in more than 20 years. It comes on the heels of an upgrade from Moody’s Investors Services last month.

Comptroller Susana A. Mendoza repaid Illinois’ federal loans years ahead of schedule, saving Illinois taxpayers $82 million.

“Prudent expense management allows the state to accelerate repayment of various budgetary liabilities,” Fitch said in its double-upgrade Thursday.

Last year, Moody’s upgraded the state’s rating on June 29, 2021, which was the first upgrade the state had earned in more than two decades. The next week, on July 8, S&P Global upgraded the state’s credit rating as well.

With Fitch’s announcement today, the state’s credit has now been boosted five times in less than a year.

“Our state has now earned five credit upgrades during my tenure as Comptroller, it’s an amazing accomplishment and I’m very proud that my team and state leaders are showing you can lead with empathy – prioritizing human and social services as well as promises made to state retirees about their pensions – while also prioritizing fiscal responsibility,” Comptroller Mendoza said.

Comptroller Mendoza has focused on paying down the state’s backlog of bills and shrinking the time state vendors wait to be paid.

“According to the March report, the Office of the Comptroller’s bill payment cycle, or the age of the state’s oldest unpaid general funds voucher for external vendors was 18 business days as of March 31. The Comptroller reports this metric has steadily decreased (aside from seasonal variation) from a peak of 210 days in November 2017,” Fitch wrote.

Under the prior governor, the state had suffered a 736-day budget impasse and eight credit downgrades, during much better economic times.

Moody’s and Fitch both cited the state’s contributions into reserves as a reason for the recent upgrades.

Comptroller Mendoza has been a strong proponent and driver of reviving the state’s Budget Stabilization Fund – commonly referred to as the Rainy Day Fund.

The FY ‘23 budget signed by Gov. JB Pritzker includes $1 billion for the Rainy Day Fund and an additional $500 million to the Pension Stabilization Fund, saving Illinois taxpayers $1.8 billion in the long run.

Under Comptroller Mendoza, there is no longer a bill backlog, rather an accounts payable, that stands at about $2.1 billion today. That’s down from nearly $17 billion in 2017.

“We’re putting our best fiscal foot forward, and we’re earning recognition for these great strides we’re making,” said Comptroller Mendoza. “Even better days are yet ahead if we keep leading with fiscal responsibility.”