Fitch: Illinois making progress but still lags the country for budget stability

[August 09, 2022]  By Kevin Bessler | The Center Square

(The Center Square) – A report by Fitch Ratings says Illinois’ budget is improving but an economic slowdown and inflation could pose a risk.  

The report found that state budgets across the U.S. are in a much better position coming into fiscal 2023 and are structured to combat inflationary and macro pressures over the next several months.

“Enacted budgets have effectively moved from restoring cuts taken during the brief but severe downturn to programmatic spending, while also adding to reserves and reducing taxes,” Fitch Senior Director Karen Krop said.

The enacted budgets consider potential economic and geopolitical headwinds. After historically strong U.S. GDP growth of 5.7% in 2021, Fitch expects growth to slow sharply in 2022 to 2.9% and then further to 1.5% in 2023, due to rapidly rising interest rates. GDP in the first two quarters of 2022 showed negative growth.

The report said strong labor markets, while integral to state revenue strength, also pose a challenge to government and school districts in recruiting and retaining employees.

Senior Director Eric Kim said all 50 states have enacted budgets as fiscal 2023 gets underway thanks largely to surging revenues.

“There are of course outliers, Illinois being one of them as the only state in the BBB category, but for the most part states are pretty well positioned to deal with downturns,” Kim said of Illinois' lowest-in-the-nation credit rating.

A rating denotes “good prospects for ongoing viability.” The financial institution’s fundamentals are adequate, such that there is a low risk that it would have to rely on extraordinary support to avoid default. However, adverse business or economic conditions could impair their standing.

Just as an individual consumer with bad credit has to pay higher interest rates, the lower the credit rating for a taxing body, the more the taxpayers have to pay in interest to pay back bonded debt that governments issue.

Despite the budget requiring annual pension system contributions to reach 90% funded by 2045, Kim said the amount being set aside each year is inadequate to fully address the state’s pension burden, and the contribution demands will grow over time if the state continues to underfund the systems.

Kevin Bessler reports on statewide issues in Illinois for the Center Square. He has over 30 years of experience in radio news reporting throughout the Midwest.