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Fitch Ratings takes a look ahead

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Illinois

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.

posted by Rich Miller
Thursday, Oct 8, 20 @ 3:17 pm

Comments

“Illinois’ budget management during the long period of economic expansion preceding the pandemic was exceptionally weak”

In good times and bad Illinois, can’t seem to get its finacial house in order.

Comment by Donnie Elgin Thursday, Oct 8, 20 @ 3:30 pm
Rating agencies are cool. Weren’t they involved in the credit backed securities and over rating them? They should be abolished, they are a joke. Not saying Illinois has it togather, just that these agencies really kind of suck.

Comment by Way down yonder Thursday, Oct 8, 20 @ 3:54 pm
Fitch translation: Vote Yes on the fair tax.

Comment by PublicServant Thursday, Oct 8, 20 @ 4:44 pm
To the post,

=== 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.===

“Recent revenue gains stabilized the state’s credit profile over the near term, but long-term trends remain a significant credit concern.”

When you put that part, surrounded as it is with this lead…

“Illinois’ budget management during the long period of economic expansion preceding the pandemic was exceptionally weak.”

This is a flashing light… “pass the fair tax as it will lead to more revenue, than move forward with that success and find a much better balance with revenue and costs, and credit assessment will be looked at accordingly”

A loss by fair tax? A loss will mean, to the honest, an immediate flattening, (no pun intended), of revenue growth via the means to raise additional monies.

We’re “now” 25 days out.

This is the flashing light… “pass that fair tax”

Comment by Oswego Willy Thursday, Oct 8, 20 @ 4:50 pm
Amen Willy.

Comment by PublicServant Thursday, Oct 8, 20 @ 8:00 pm
Pretty much what you would expect from the rating houses.

What was left more or less unsaid is, if the graduated tax fails, Illinois better increase the flat tax to raise similar revenue.

Comment by RNUG Thursday, Oct 8, 20 @ 10:25 pm