For Fitch's lowest rated states, California, Illinois and New Jersey, management decisions over the near term will be key to credit quality, according to a Fitch Ratings report.
"Fitch judges California to have the strongest fundamentals of the three states and Illinois the weakest. Although accumulated factors will continue to keep these states' ratings below average for the foreseeable future, California is on the path for continued improvement, while upcoming decisions in Illinois and New Jersey could serve to either stabilize or further weaken their credit profiles," said Laura Porter, Managing Director.
Fitch believes critical decisions made in the near future in Illinois will have a pivotal impact on the financial posture of the state. Taking steps to address the longstanding structural mismatch between revenues and spending would put the state on more solid financial footing, while failure to take action would be a return to past practices and leave the state particularly poorly positioned to confront future downturns.
New Jersey's challenges are growing. Fitch believes the state has the ability to act in a way that preserves credit quality at the current A rating level. However, this will require addressing the pension funding issue that is a rapidly growing pressure for the state. Given the contentious relationship between the governor and legislature and the strong disagreement regarding the appropriate course of action, Fitch's Negative Rating Outlook reflects concern that the state's longer term structural and liability challenges may remain unaddressed.
California is making progress, instituting significant institutional improvements that have enhanced the state's capacity to address future fiscal and budgetary cyclicality. Continued progress on reducing budgetary borrowing, maintenance of structural balance, and addressing key fiscal risks could result in rating improvement.
Given U.S. states' broad powers, when credit quality drops below the AA category it generally results from decisions over time or significant structural challenges. Although an A rating is low for a U.S. state, it still denotes high credit quality. Expectations of default risk are low and the capacity for payment of financial commitments is considered strong.
Fitch rates California A, Stable Outlook; New Jersey A, Negative Outlook; and Illinois A-minus, Negative Outlook.
