Ratings agencies differ on Illinois’ credit outlook while acknowledging state’s high pension debt
(The Center Square) – Illinois’ credit rating maintains a notch above “junk” status, but ratings agencies have different takes on the state’s credit outlook.
The most recent report released Tuesday by Fitch Ratings affirms Illinois’ issuer default rating is BBB-, “notably lower than other states.” S&P Global Ratings also affirmed the state’s BBB- rating for long-term general obligation debt. But the agencies differed on the outlook with Fitch giving Illinois a negative outlook while S&P revised the state’s negative outlook to stable.
The Fitch rating “reflected an ongoing pattern of weak operating performance and irresolute fiscal decision-making that has produced a credit position well below the level the state’s broad economic base and substantial independent legal ability to control its budget world otherwise support,” the agency said. “The ratings also reflect the state’s elevated long-term liability position, modest long-term economic and revenue growth profile and adequate expenditure flexibility.”
As to the negative outlook, Fitch said that “reflects the risks posed by the state’s lack of meaningful reserves and its already extensive use of other fiscal-management tools, such as deficit financing, but increasingly likely substantial federal aid could prove an effective mitigant.”
Illinois is set to get around $7.5 billion from the federal government in direct aid to the state’s budget.
What could lead to a change in the state’s credit rating one way or the other varies, Fitch said.
Changes that “lead to materially higher revenues or reduced spending could” lead to a positive rating action while a downgrade could be triggered “by the lack of a credible path to reversing the state’s current pandemic-driven use of non-structural budget measures or a reliance on short-term measures that materially compound the state’s long-term challenges such as it’s pension liability burden.”
“Spending growth, absent policy actions, is likely to be higher than revenue growth, driven mainly by increasing pension demands,” the report said. “Pension costs are unusually large and, as noted above, will continue to grow under current law. Illinois has chronically underfunded its pension system based on a statutory formula that targets only 90% of full actuarial funding over the long term.”
Illinois’ long-term liabilities, particularly pension liabilities, are very high for a U.S. state, Fitch said.
“Fitch estimates the state’s total long-term liabilities at approximately $200 billion with pensions accounting for about 80% of the total,” the report said.
S&P said the state’s stable outlook from negative “reflects the waning of fiscal and economic uncertainty stemming from the COVID-19 pandemic and subsequent economic downturn,” S&P Global Ratings credit analyst Geoff Buswick said in a statement.
Among the factors for the state’s BBB- rating, S&P reports, is an empty budget stabilization, or rainy day fund, the remaining “still-sizable” bill backlog, the state’s pension funding practices and recurring late audit reports. There’s also an unknown of the pace of Illinois’ recovery from the pandemic.
“We could lower the rating if we believe Illinois’s bill backlog is climbing meaningfully or the state’s liquidity position weakens to a level that jeopardizes its ability to finance core government services in a timely manner,” S&P said. “Any upside to the state’s creditworthiness, however, remains somewhat constrained by the poorly funded pension systems and other outsize liabilities.”
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