Illinois drew a fresh rating upgrade Tuesday for making further progress in tackling its chronic fiscal sore spots.
Moody’s Investors Service raised Illinois’ general obligation and sales tax-backed Build Illinois bonds by one notch to A3 from Baa1 and assigned a stable outlook. The upgrade also lifts the Metropolitan Pier & Exposition Authority’s rating one notch to Baa2 from Baa3.
“Like other states, Illinois enjoyed solid tax revenue growth over the past couple years, expanding its capacity to build financial reserves and increase payments towards outstanding liabilities,” Moody’s said. “The state is on track to close fiscal 2023 … with further growth in reserves that are already at their strongest level in over a decade. The state is also increasing payments to its pension plans. These latter two points are evidence of improving governance.”
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The action impacts about $26 billion of GOs, $2 billion of sales tax bonds and $4 billion of appropriation bonds. S&P Global Ratings last month upgraded the state’s GOs to A-minus from BBB-plus after release of the proposed fiscal 2024 budget. Fitch Ratings rates Illinois at the BBB-plus level. It has yet to publish a review that incorporates the proposed budget.
Illinois’ GOs haven’t carried a Moody’s rating in the A category since being cut to Baa1 from A3 in October 2015. The rating went on to sink to a low of Baa3, one notch above junk, in June 2017 during the state’s two-year budget impasse when then Gov. Bruce Rauner, a Republican, locked horns with the legislature’s Democratic majority. The trajectory shifted with Moody’s upgrades in 2021 and 2022.
A burdensome pension tab and the damage a recession could inflict on state coffers still strain the rating that remains the lowest among states. New Jersey, which Moody’s raised this year to A2 from A3 and assigned a positive outlook, follows. Illinois and New Jersey are the only two states rated in the single-A category.
Illinois GO paper also trades at the widest spread among states in the secondary market, although the spread on the state’s 10-year has shrunk to 153 basis points from a 163 bp spread just ahead of the S&P upgrade. Earlier in the year it was at a 173 bp spread.
Moody’s commentary offers Gov. J.B. Pritzker some bragging rights on how the state has managed its surpluses.
The state’s governance metric weighed heavily on the action under Moody’s environmental, social, and governance framework as it rose to a two ranking from a three as the state.
“Illinois’ operating flexibility will remain constrained by certain institutional structures, such as the state’s constitutional protection of pension benefits. The state is, however, displaying improved management of its budget by making conservative revenue assumptions and applying surplus revenue towards the payment of debt and growth in reserves,” Moody’s said.
Conservative revenue projections led to billions in surplus tax revenues and Pritzker’s proposed fiscal 2024 budget anticipates a drop in revenues due to an anticipated recession.
“We have balanced our budget, paid our bills on time, cleared out decades of debt, made extra pension payments, and saved billions for a rainy day,” Pritzker said in a statement. “There’s more work to be done.”
The budget package lifts education and human services while also making a $200 million supplemental pension contribution and a deposit to the rainy-day fund. Over the last three years, with the help of an infusion of billions in federal COVID-19 relief and ballooning tax collections, the state paid off $8 billion in overdue bills — reducing accounts payable to $963 million — paid off short-term cash and inter-fund and federal borrowing, built up a depleted budget stabilization fund to $1.9 billion, and made $500 million in supplemental pension contributions.
All told the state expects to have paid off $10 billion of various forms of debt through fiscal 2024 and the reserve is on track to exceed $2 billion in the coming years.
A further boost up Moody’s ratings scale requires a heavier lift on reserves and pension funding or economic strengths. “These challenges include heavy long-term liability and fixed cost burdens that constrain the state’s financial flexibility and contribute to a weak financial position compared to other states, despite the recent improvement in fund balance,” Moody’s said.
The state’s economy has grown at a slower clip than most others, given a weak population trend leaving the state more vulnerable to balance-sheet damage in a recession. The state’s $139 billion of unfunded liabilities for a system just 44% funded also strains the state’s fiscal condition and payments consume about 20% of the general fund.
The Build Illinois bonds carry the same rating as the GOs due to a lack of legal and physical separation of the pledged tax revenue from the state’s general financial activities. MetPier’s appropriation-supported bonds bear a two-notch distinction due to the less essential nature of the convention center.
State Comptroller Susana Mendoza used the report to promote passage of legislation she is championing that “will enshrine these responsible budgeting practices of requiring regular payments into the Rainy Day Fund and the Pension Stabilization Fund, leading to even more upgrades,” she said in statement.
Illinois is home to about 12.8 million residents, making it the sixth-largest state by population. It has the fifth-largest economy among U.S. states with an estimated gross domestic product of about $1 trillion, Moody’s said.