Fitch shifts Illinois state government’s economic outlook from negative to positive

·3 min read

Fitch Ratings maintained the state’s credit rating at one step above junk-bond status, but reversed its forecast outlook from negative to positive reflecting improved post-pandemic economic recovery and tax revenues and a new state budget that avoids delaying bills and accelerates paying debt.

The move from negative to positive “reflects Illinois’ preservation of fiscal resilience given the quick and sustained economic recovery since the start of the pandemic, coupled with the state’s unwinding” of one-time cash-flow moves such as bill payment delays and interfund borrowing, Fitch said.

“Recent fiscal results and the enacted fiscal 2022 budget suggest further improvements in operating performance and structural balance in the near and medium-term that could support” a ratings upgrade, the credit rating agency said.

Fitch was the last of the big three credit rating agencies to signify an improved economic outlook for state government, following revisions by Moody’s Investors Services and S&P Global Ratings in March that moved the state from a negative to stable outlook.

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Democratic Gov. J.B. Pritzker credited the Democratic-led General Assembly and its leaders for working together with him “in our common purpose of bringing about long-term fiscal strength for Illinois.”

“Fitch’s improved outlook for Illinois is yet another sign of positive momentum for our state’s fiscal condition, a testament to strong financial management and responsible actions by the General Assembly and my administration, and a product of the state’s economic resilience,” Pritzker said. “The story of Illinois in 2021 is that in the face of a crisis, fiscal discipline and smart economic policy pays off.”

Fitch noted that its BBB-minus rating for state government was reflective of “a long record of structural imbalance and irresolute fiscal decision making, resulting in a credit position well below what the state’s slow-growing but broad economic base and substantial ability to control its budget would otherwise support. The rating also reflects the state’s elevated long-term liability position and resulting spending pressure” due largely to its massive public-employee pension debt.

But in contrast to the 2008 Great Recession and a subsequent two-year period when Illinois went without a state spending plan due to an ideological battle between one-term Republican Gov. Bruce Rauner and the Democratic-controlled General Assembly, there have been “recent improvements,” including paying off more overdue bills, interfund borrowing and enacting plans to retire early pandemic loans taken from the Federal Reserve that “signal improvement in budget management.”

Fitch credited federal stimulus funds and direct federal aid for playing a “key role in supporting a rebound in economic activity,” though it noted Illinois traditionally lags behind national trends such as job recovery.

But it said Illinois’ latest forecast anticipates revenue growth well ahead of prior expectations and in line with pre-pandemic estimates,” and it credits the state for so far focusing federal recovery aid on one-time investments rather than on recurring operating needs.

“Illinois remains comparatively poorly positioned to address a future economic downturn, but recent improvements could signal sustainable improvement. The state’s approach to budgetary gaps has historically been to use temporary measures such as delaying payments,” Fitch said.

“Since the start of this calendar year, Illinois has made notable progress in unwinding those measures with revenue growth ahead of expectations supporting sharp declines in the bills backlog and plans to repay all outstanding federal loans and interfund borrowing. The state appears positioned to at least restore financial resilience to pre-pandemic levels,” the credit rating agency said.

While the state’s spending plan for the current budget year that ends at month’s end was adopted reflecting “deep economic uncertainty and relied significantly on nonrecurring measures,” the spending plan adopted earlier this month for the budget year that begins July 1 “reverses them and makes progress toward structural balance,” Fitch said.

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