Fitch raises Illinois credit rating two notches

[May 06, 2022] By PETER HANCOCK
Capitol News Illinois
[e-mail]

SPRINGFIELD – Fitch Ratings on Thursday raised the state of Illinois’ rating for general obligation bonds two notches, to BBB+, making it the second rating agency to do so in recent weeks and marking the fourth time the state has received a credit upgrade in the last year.

“The upgrade to 'BBB+' reflects fundamental improvements in Illinois' fiscal resilience including full unwinding of pandemic-era and certain pre-pandemic non-recurring fiscal measures, meaningful contributions to reserves and sustained evidence of more normal fiscal decision-making,” the agency said in its announcement.

Fitch is one of three major credit rating agencies that grade government-issued debt. Moody’s Investors Service raised Illinois’ rating on April 21. The third rating agency, S&P Global Ratings, last raised Illinois’ rating in July 2021, one week after Moody’s gave the state its first upgrade in more than 20 years.

Before those changes, Illinois had suffered multiple credit downgrades, many of which were driven by the two-year budget impasse from July 2015 to August 2017, leading the state to the lowest investment-grade rating available.

The move by Fitch puts Illinois’ bond rating three notches above “speculative grade,” or what is commonly known as “junk” status. Bonds in that category generally cannot be held by institutional investors such as mutual funds or pension systems and, therefore, are subject to higher interest rates.
 

At the same time, Fitch upgraded the state’s general obligation bond rating, it also upgraded the state’s Build Illinois sales tax revenue bonds to A, from ‘BBB+.

In its analysis, Fitch noted that Illinois’ financial performance has improved recently but remains weaker than other U.S. states. It gave the state credit for shoring up its cash reserves, reducing its backlog of past-due bills, retiring some outstanding debt and “smoother fiscal decision-making.”

But it also noted that the state continues to face large unfunded pension liabilities, currently estimated at more than $130 billion.

Fitch made its announcement just moments before Gov. JB Pritzker held a news conference to announce the signing of a bill aimed at reducing those pension liabilities. House Bill 4292 authorizes $1 billion in borrowing to extend a program that allows workers in the state’s five pension systems to take early buyouts of their benefits.

That program, first launched under former Republican Gov. Bruce Rauner, was set to expire in 2024. The new legislation extends that to 2026.

Gov. JB Pritzker speaks at a news conference in his office at the Capitol Thursday. (Capitol News Illinois photo by Peter Hancock)

“Today, I'm very proud to sign yet another bill to round out Illinois’ significant fiscal progress,” Pritzker said at a bill signing ceremony at the Statehouse. “Yet again, we are saving taxpayers hundreds of millions of dollars.”

Pritzker said the recent rating upgrades were the result of passing four consecutive balanced budgets, including the one just passed for the upcoming fiscal year that dedicates $1 billion to the state’s so-called "rainy day fund” and another $500 million above what’s required by law to reduce the state’s pension liability.

He said the buyout program so far has reduced that liability by more than $1.4 billion, and extending the program for an additional two years will reduce it even further.

“I believe in fiscal responsibility and in responsible fiscal management,” he said. “That means taking every action possible to address our pension obligations while honoring promises made to current and retired workers, promises made by governors and legislators on both sides of the aisle.”

The bill passed with bipartisan support, 108-2 in the House and 52-1 in the Senate.

Rep. Mark Batinick, R-Plainfield, who is stepping down from the General Assembly this year, was a cosponsor of the bill and one of the chief sponsors of the original legislation.

“I said back in 2018 when the ‘Batinick Buyout’ first passed through the General Assembly that we had to make changes to our pension system if we were going to solve our long-term fiscal problems in Illinois,” he said in a statement. “I am delighted to see this program extended after successful implementation that has saved the state over $1 billion on our unfunded pension liability. I look forward to seeing how much more we can save to finally overcome and move past our state’s longtime pension crisis.”

Illinois Comptroller Susana Mendoza also praised the legislation as another move to stabilize the state’s fiscal situation.

“The state is making monumental progress toward getting our fiscal house in order. And this is just one more step, but it's a huge step, in that direction,” she said during the news conference.

Capitol News Illinois is a nonprofit, nonpartisan news service covering state government that is distributed to more than 400 newspapers statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.