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Fitch hints at ratings upgrade, praises budget-making process, warns against making proposed temporary tax cuts permanent

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Illinois

* I wrote last July that Fitch owes Illinois a credit upgrade. Fitch put out a report today headlined “Governor’s Budget Proposal Reflects Economic and Fiscal Rebound”…

The recently released executive budget proposal from Illinois’ governor highlights the state’s recent economic and fiscal progress and suggests the potential for further sustainable improvement to its credit profile. Like many states, Illinois has benefited significantly from the broad national economic recovery, as the governor’s proposal reflects in the form of revenue projections that are well ahead of pre-pandemic estimates.

Robust Revenue Growth — For Now

Positive general funds (GF) revenue momentum in fiscal years 2022 and 2023 is driven by a mix of one-time gains and economic growth. While estimates are ahead of November 2021 projections, the Governor’s Office of Management and Budget (GOMB) prudently projects a deceleration of growth in 2023, as one-time activity, particularly in corporate income taxes (CIT), rolls off while growth moderates from a breakneck 2021 pace.

One-Time Uses for Budget Surplus

Illinois’ governor recommends largely nonrecurring uses for the significant revenue surplus, including credit-positive efforts to rebuild fiscal resilience and reduce long-term liabilities. Tax and fee relief is structured as one-time, thereby mitigating near-term credit risk.

Federal Aid Allocations Continue

The fiscal 2023 budget and other actions in the current legislative session will likely allocate a significant influx of supplemental federal aid received by Illinois, as with other states.

Accounts Payable Progress Continues

The state’s once-substantial backlog of unpaid bills has been steadily reduced, with further improvement possible should the governor’s proposals be implemented. Stability in managing accounts payable will be another indicator of Illinois’ improved operating performance and fiscal management in recent years.

Structural Improvement Supports Upward Rating Potential

Fitch Ratings’ Positive Rating Outlook on Illinois’ ‘BBB–’ Issuer Default Rating reflects preservation of fiscal resilience through the height of the coronavirus pandemic coupled with the unwinding of certain nonrecurring fiscal measures. Continued operating performance improvement and structural balance, such as full repayment of interfund borrowings and continuing a more normal fiscal decision-making process, could support a return to the state’s pre-pandemic rating or higher. […]

Pension Liability Will Remain a Credit Challenge

The budget proposal adheres to the statutory requirement for annual pension system contributions that are sufficient for these systems to reach a 90% funded level by 2045, which Fitch considers inadequate to fully address the pension burden and a sign of structural budgetary imbalance.

CGFA estimates the state’s fiscal 2023 pension contributions under the 90% target will fall $4.1 billion short of actuarially determined contributions targeting 100% funding. Fitch anticipates pension liabilities and related contribution demands will grow over time if the state continues to underfund the systems. Importantly, yoy swings in market performance, such as the robust gains in fiscal 2021, can significantly shift reported metrics each year. Fitch’s analysis remains focused on long-term trends and expectations. […]

Temporary Tax Relief

The governor also recommends approximately $1.0 billion in one- time tax and fee relief, which Fitch considers neutral to Illinois’ near-term credit quality as nonrecurring uses. As with any temporary policy measures, the proposals come with some long- term risk if state leaders are politically compelled to either extend the measures or make them permanent. […]

Backlog of Outstanding Bills Diminished

Illinois’ accounts payable profile continues to improve, signaling the ongoing shift toward more normal and sustainable levels. Since a reported $16.7 billion high in November 2017 (or nearly half of GF revenues that year), GF accounts payable have declined considerably. […]

Federal Aid Decisions Likely […]

In his executive budget, the governor proposes using approximately $535 million of the remaining ARPA aid for nonrecurring uses, leaving an estimated $3.5 billion unallocated. Fitch will carefully assess the state’s plans for the remaining ARPA aid and anticipates it will be largely nonrecurring, thereby avoiding the creation of a fiscal cliff. […]

An Accelerated Budget Season

Legislative budgetary deliberations should begin in earnest in the coming weeks, with both chambers facing an abbreviated schedule that concludes on April 8. Fiscal decision-making deteriorated considerably in the state over the last decade, particularly during the 2015–2017 impasse, but has improved in recent years. Continuation of the recent pattern of more normalized fiscal decision-making, including on-time budgets that primarily address fiscal challenges with sustainable measures, could support positive rating action.

All emphasis added.

posted by Rich Miller
Wednesday, Feb 16, 22 @ 1:12 pm

Comments

For me, this is what governing is about… and being recognized for the governing, all the steps included.

As I read, I note that Fitch, again, fails to recognize the constitutional responsibilities to debt, while cataloging the specifics to this current budgetary moment.

The doomsayers will not like this type of cataloging, as it also goes chapter and verse to… good.

Comment by Oswego Willy Wednesday, Feb 16, 22 @ 1:19 pm
GOP, Probably: “Fitch is a bunch of liberal hacks. Put us back in charge and we’ll steer things back off the cliff, all while telling everyone how fiscally responsible we are.” /s

Comment by Ron Burgundy Wednesday, Feb 16, 22 @ 1:26 pm
Notice that Fitch kind of moved the pension fund goalposts be to 100% while also continuing the ongoing argument for full actuarial funding.

The sky isn’t going to fall if the State aims for only 90%. The pension funds have survived the past 50+ years, swinging between 40% and 90%, most of time in the 40’s. It will continue to survive.4

And we’re most the way up the ramp to actuarial funding; we’ll be there in a few years.

The rating houses really should treat State pension debt differently than private pensions; the State won’t be going out of business.

And Rich is right … they owe the State an upgrade or two.

Comment by RNUG Wednesday, Feb 16, 22 @ 1:30 pm
=== Notice that Fitch kind of moved the pension fund goalposts be to 100% while also continuing the ongoing argument for full actuarial funding.

The sky isn’t going to fall if the State aims for only 90%. The pension funds have survived the past 50+ years, swinging between 40% and 90%, most of time in the 40’s. It will continue to survive.===

Which I find odd as they do this without the recognition of the constitutional realities.

Comment by Oswego Willy Wednesday, Feb 16, 22 @ 1:35 pm
A ground hog’s shadow has more impact on the weather than Fitch’s bond rating matters to the security of investing in an Illinois general obligation bond.

They’re probably motivated more by concern of what institutional investors would think if they produced a rating that actually reflected the risk of buying our debt or angering GOP Daddy Kenny G by giving another clear indication that the state’s finances are better managed by a Democratic administration.

Comment by Candy Dogood Wednesday, Feb 16, 22 @ 2:17 pm
Seems JB has moved the ball in a way that Rauner only promised to. Not that the republicans can acknowledge that…

Comment by Lincoln Lad Wednesday, Feb 16, 22 @ 3:29 pm