Fitch Ratings revised Illinois' outlook to positive from stable on Wednesday, pointing to the state's recent trend toward "normalized operating performance" and a deep and diverse, albeit slow-growing, economy.
Concurrently, Fitch assigned an A-minus rating to the state's upcoming $900 million general obligation bond issuance and affirmed the state's issuer default rating at A-minus.
The outlook revision follows recent upgrades to A1 from A2 from
Illinois has demonstrated steady progress toward sustainable budgeting, a gradual decline in long-term liabilities and repeated contributions to reserves, Fitch said in the report.
The rating agency said an upgrade could result if Illinois shows continued improvement in fiscal resilience, particularly "through ongoing contributions to dedicated reserves so that they approach 7.5% of state revenue, while maintaining other improvements in fiscal management, such as normalized accounts payable and budgets that do not rely on non-recurring measures to balance."
Further steps toward structural balance — such as by fully funding pensions or reducing the long-term liability burden to under 20% — or improving revenue growth prospects could also lead to an upgrade, Fitch said.
In a statement, Andres Correa, deputy press secretary for Gov. JB Pritzker, called the outlook revision "the latest sign of continued momentum for the state."
The Fitch outlook revision "is another recognition of years of work to strengthen the state's finances, including eight consecutive balanced budgets, more than $2.5 billion in reserves, billions of dollars in debt paid down, and continued action to address long-term pension liabilities," Correa said.
Fitch cautioned the state "remains challenged by structural imbalance primarily due to pension underfunding, elevated long-term liabilities relative to state peers and lower dedicated reserves," and noted that pension benefits in Illinois, an ongoing source of budgetary pressure, are constitutionally protected and thus effectively untouchable.
But the rating agency said it expects Illinois' revenue base of income and sales taxes to "capture the breadth of its economy" over the long term. It also cited the state's considerable expenditure flexibility and declining carrying costs.
"Management has eliminated many outstanding budgetary liabilities and established a sustainable pattern of smoother fiscal decision-making, including implementing revenue increases to support spending demands," Fitch said.
Correa noted the governor's team met with Fitch, Moody's and S&P in August to promote the state's continued fiscal progress and improved financial position.
"Fitch's move to a positive outlook is another step forward," he said. "The state will continue making the case that Illinois' credit ratings should fully reflect the progress it has made and the strength of its financial position."
