CHICAGO — Illinois Gov. J.B. Pritzker received a clear warning from Fitch Ratings that his proposed fiscal 2020 budget risks a downgrade.
The $77 billion all-funds plan fails to make material gains in structurally tackling red ink, Fitch said in a formal review published Tuesday that offered the strongest signal yet a downgrade looms if enacted as proposed.
“Fitch has indicated that we would lower the state's” rating if it “returned to a pattern of deferring payments for near-term budget balancing,” Fitch’s Illinois analysts Eric Kim and Karen Krop wrote in the review published Tuesday.
At BBB, Fitch has room to downgrade Illinois without sending it to speculative grade. It already assigned a negative outlook. Moody's Investors Service and S&P Global Ratings are already at Baa3 and BBB-minus, with stable outlooks.
“Elements of the governor's proposal, including a $1.5 billion GO bill backlog borrowing that reduces but leaves largely unresolved the 2019 deficit and numerous one-time measures in fiscal 2020, appear to do that without a clear path toward long-term balance,” the Fitch review said.
The state has time to avoid a rating hit. “Fitch plans to review the state's rating and negative outlook following passage of a final budget for fiscal 2020,” analysts wrote.
The review followed an S&P report Monday that offered a stinging review of Pritzker's plan and suggested its adoption could prompt some form of negative action, though S&P analysts stopped short of a direct warning on the timing.
“If Illinois were to adopt the budget in its current form, it would have negative implications for its credit trajectory,” the report said.
Pritzker has billed the general fund spending plan as a “bridge” budget to manage state finances until voters can be asked in 2020 to approve a shift to a graduated tax from a flat one, a change he says would raise more revenue with from wealthier residents to stabilize state finances.
“The governor proposed a realistic plan to serve as a bridge to the future, with the ultimate goal of a fair tax system that will transform state finances — including pensions — in a momentous way. No element of the comprehensive approach can be viewed in isolation and Gov. Pritzker is ready to work with the legislature to put the state back on a path towards fiscal stability,” Pritzker spokeswoman Jordan Abudayyeh said in response to the Fitch action.
The administration did not answer questions about whether it was willing to accept rating downgrades as the cost of waiting for the hoped-for graduated tax to take hold before moving to structurally reduce red ink.
Fitch takes the budget to task for its reliance on non-recurring revenues — about one-third of the proposed new revenue maneuvers — and savings from an uncertain pension proposal “that poses risks for the state” and questions the wisdom of banking a graduate tax whose prospects are uncertain.
Fitch remains worried about how the state will tackle the current year deficit of $1.5 billion on top of the fiscal 2020 projected $3.2 billion deficit.
The state would put $600 million from a $1.5 billion bill backlog borrowing into the general revenue fund to pay down remaining interest accruing bills to reduce the current deficit. The remaining $900 million of proceeds would go to pay off unpaid employee health insurance bills.
Pension proposals that call for extending the current payment schedule by seven years, issuing $2 billion of pension obligation bonds, and extending the current pension buyout program also pose problems for the state’s longer-term credit profile. The value of proposed asset transfers to boost pension funding and the cost of re-amortization are uncertain.
“Without committing to full actuarially determined contributions, the re-amortization could cost the state more over time by perpetuating an already inadequate funding approach,” Fitch said. The state has a $133.7 billion unfunded liability tab and the system is just 40.1% funded.
Municipal Market Analytics’ expanded this week on its original assessment on the pension proposals in its weekly outlook report, laying out the uncertain rating impact as the state takes pension relief up front.
“This heightens the probability of a rating downgrade, quite possibly to junk,” MMA wrote. “On the other hand, the rating agencies could permit a grace period for the state to put the income generation portion of the governor’s fiscal plan in place, averting a below investment grade rating, at least for the near term.”
And while the state is touting the benefits of leveraging its public assets, a downside is the potential hit existing bondholders could see in the value of their investment.
“Current and future citizens, not to mention bondholders, that previously may have had a future claim/benefit from the sale/monetization of an asset, would be in diminished position after the transfer,” MMA wrote.
