Fitch changes Illinois credit outlook to 'stable;' rating remains unchanged

Fitch Ratings moved its outlook on Illinois' credit rating from "negative" to "stable" Wednesday, good news for the state, which has the worst credit rating in the nation.

While the outlook improved, Fitch Ratings kept the state's BBB rating in place. That means the state's credit rating remains just above junk status, where it has been for years.

"Illinois' 'BBB' (Issuer Default Rating) and (General Obligation) ratings continue to reflect an ongoing pattern of weak operating performance and irresolute fiscal decision-making that has produced a credit position well below the level that the state's broad economic base and substantial independent legal ability to control its budget would otherwise support," Fitch analysts wrote in a report. "The state's elevated long-term liability position remains a key credit challenge."

Illinois has for years struggled with low bond ratings because of years of budget deficits, growing unfunded pension liabilities and political dysfunction that led to a multiyear budget impasse. A lower bond rating for government bonds means taxpayers have to pay more when the government borrows money for things such as roads, bridges and other infrastructure projects

In 2017, just before lawmakers overrode then Gov. Bruce Rauner's veto of an income tax increase and a state budget, rating agencies warned the continued stalemate could hurt the state's credit rating. The state's rating didn't change, nor did its outlook, even after the budget and tax increase passed.

On Wednesday, Fitch said it changed Illinois outlook from "negative" to "stable" because of a windfall of over $1.4 billion of increased tax revenue in April this year.

"The positive April revenue surprise seen in Illinois, and other states, supported a significant increase in fiscal 2020 estimated revenues, easing the path to budget adoption and allowing the state to reduce (but not eliminate) reliance on nonrecurring measures," the Fitch report said. "The state now has a plausible and achievable 2020 budget plan, leaving the state better positioned from a fiscal perspective, and the potential for a rating downgrade in the near-term has receded."

The Fitch report noted the proposed constitutional amendment voters will consider next year to allow for a progressive income tax that would charge higher rates for higher earners.

"The recent gains, however, are somewhat tenuous and their sustainability hinges on the state's actions over the next several years," the report said, "particularly around the November 2020 ballot initiative on the graduated individual income tax."

Despite the outlook upgrade, the state continues to face credit challenges.

"Implementation of proposals to defer or similarly alter annual pension obligations without offsetting measures to reduce long-term costs could also trigger a downgrade," the report said. "(Gov. J.B. Pritzker) had proposed such a measure in his executive budget that Fitch previously noted as a rating concern, but the enacted budget did not include significant pension changes."

Pritzker had wanted to extend how long Illinois has to get its underfunded pensions up to 90 percent funded, transfer state assets to the pension funds, issue more debt to make some pension payments, and make a pension buyout plan permanent. The rating agency had concerns with all of those proposals. But after the April windfall, most of those proposals weren't needed. The state did expand the buyout plan, but didn't make it permanent.

"Illinois remains very constrained in its ability to revise benefit costs given state constitutional limitations (on diminishing pension benefits)," analysts wrote.

The report also touched on the state's health insurance tax, which was part of the budget package that passed in June, noting that has yet to be approved by the federal government.

"Outright rejection of Illinois' MCO assessment, or approval at a reduced level could force the state to make midyear adjustments in 2020," according to the report.

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