CHICAGO – Two rating agencies weighed in Monday with positive assessments of the Illinois House’s passage of a fiscal 2018 budget and $5 billion tax package.

Illinois State Capitol
Illinois State Capitol Adobe Stock

The commentaries from Fitch Ratings and S&P Global Ratings provide the General Assembly with some breathing room. Entering the new fiscal year last Saturday without a budget plan in place for a third consecutive fiscal year had put the state at risk of a historic drop into junk territory.

“Passage of tax and spending legislation by Illinois' House of Representatives on July 2 represents a meaningful step toward the enactment of a comprehensive budget for fiscal 2018,” wrote S&P analysts Gabriel Petek and Eden Perry. S&P rates the state BBB-minus and has the rating on watch.

S&P had made clear in previous commentaries that the state faced the prospect of being the first to land in junk territory because of its structural deficit and the magnitude of its unpaid bills, at nearly $15 billion. A court order Friday that requires the state to bolster monthly Medicaid voucher payments by $586 million “threatens to provoke a liquidity crisis,” S&P said.

“Enactment of a comprehensive budget with revenue and expenditure alignment could help put a halt to this erosion of the state's sovereignty over its fiscal affairs,” S&P wrote in the Monday report. “In this way, the legislation passed by the House could represent the first step in a stabilization of Illinois' fiscal outlook and may lead to an easing of pressure on the state's credit quality.”

Fitch Ratings called the developments "concrete progress on reaching an agreement to break the two-year long budget impasse." The report cites both spending cuts and revenue increases and acknowledges a threatened veto. Fitch, too, rates the state BBB and has it on watch.

“Enacting a budget that sets the state on a path toward budgetary balance and provides a means to address the state's accumulated budgetary liabilities would stabilize Illinois' Issuer Default Rating and related ratings,” Fitch wrote.

Fitch remains on course to resolve its placement of the state’s BBB rating on watch by the end of July and “will continue to monitor the developments.”

The rating agencies’ positive comments were offset by warnings that the state has a long way to go to stabilizing its finances and the current ratings remain at severe risk should the budget progress stall.

More than a dozen House GOP members broke with Gov. Bruce Rauner to narrowly approve a tax increase package on Sunday. Rauner is opposed to the plan because it includes tax hikes while his demands for worker’s compensation reforms and a local property tax freeze minus Democratic proposed exemptions have not been finalized.

A three-fifths majority is needed to both win approval with an immediate effective date and to withstand a threatened veto. The $36 billion budget and tax hike package are now pending before the Democratic Senate which is in session Monday.

The House approved amended Senate bills so the Senate must now concur on the differences. Passage is not sure bet as in a previous vote the tax hikes passed with only a simple majority.
Should the budget clear the Senate and then overrides of a threatened veto succeed, both rating agencies warned of the long road ahead of the state.

“Even with a budget, however, it's likely that Illinois' finances would remain strained and vulnerable to unanticipated economic stress,” S&P wrote. “If a budget is enacted, the degree to which it closes the state's structural deficit, provides a pathway for addressing the backlog of unpaid bills, and its impact on cash flows, will be important factors in our review of its effect on Illinois' credit quality.”

The budget plan does not include a cash flow borrowing, although Democrats and Republicans have proposed a range of $4 billion to $7 billion.

If the momentum stalls, S&P said “the weakened condition of Illinois' finances and liquidity provide it with minimal margin at its current rating level.”

“Temporary or partial measures, or a failure to enact a budget within the context of this session, would result in a downgrade," analysts Karen Krop and Eric Kim wrote. "The continuation of spending without sufficient revenues, particularly in light of the ongoing legal challenge to the state's prioritization of other payments ahead of Medicaid payments, will increase liquidity pressure.”

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