Illinois got rare good rating news Wednesday when Fitch Ratings revised its outlook to stable from negative after an April tax windfall that set the table for an improved fiscal 2019 and 2020 budget picture and pushed rating threats to the backburner, at least for now.
Fitch affirmed the state’s BBB rating, two notches above a speculative grade, and one notch above where Moody’s Investors Service and S&P Global Ratings rate Illinois general obligation debt. All three now assign a stable outlook.
The revision reflects key developments over the last three months that began with an unanticipated revenue surge of $1.5 billion in April. It positioned the state to resolve a sizable fiscal 2019 mid-year budget gap and enact an on-time fiscal 2020 budget, Fitch said.
The positive April revenue surprise also “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 non-recurring measures,” Fitch 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 stability reflects a near-term view and rating risks loom.
“The recent gains, however, are somewhat tenuous and their sustainability hinges on the state's actions over the next several years, particularly around the November 2020 ballot initiative on the graduated individual income tax,” Fitch said.
First-year Gov. J.B. Pritzker has made the tax change the cornerstone of his plans to stabilize state finances.
The tax change, if approved, could raise substantial revenue, estimated at more than $3 billion annually, but it faces an uncertain path before implementation.
“The credit implications of the November 2020 vote on the income tax amendment depend on whether Illinois uses any increased revenues to address structural budget challenges, or if the state can adequately adjust its budget to work towards structural balance if the amendment fails,” Fitch warned.
In Wednesday's action, Fitch also affirmed the state’s sales-tax backed Build Illinois bonds at A-minus and revised the outlook to stable from negative.
Fitch will review ratings for other state-related bonds that may be affected by the GO outlook change within the next two weeks. Outstanding bonds include the Metropolitan Pier and Exposition Authority expansion project bonds currently rated at BBB-minus with a negative outlook, Illinois Sports Facility Authority sports facilities bonds rated BBB-minus and negative, and Chicago motor fuel tax revenue bonds rated at BBB-minus and negative.
The $1.5 billion April revenue windfall — similar to what was seen in other states due to federal tax changes — prompted the state to drop a controversial proposal to extend the current pension funding scheme by seven years. Market analysts viewed the potential move as a rating threat given the state’s massive $133.7 billion unfunded tab in a system just 40% funded.
The state passed a $40 billion general fund budget ahead of the July 1 start of fiscal 2020 along with a six-year, $45 billion capital program.
