Illinois’ investment grade rating threatened by coronavirus fiscal toll

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Illinois inched closer to a junk rating as S&P Global Ratings moved the outlook on the state’s BBB-minus credit to negative from stable due to the economic, pension, and budgetary threats posed by the COVID-19 pandemic.

The action came late Friday. The negative outlook was also assigned to the BB-plus ratings assigned to appropriation and moral obligation-backed debt.

The action had a cascading effect as the outlook on state sales tax bonds, the Metropolitan Pier and Exposition Authority, and Illinois Sport Facilities Authority are also all now negative.

"There is at least a one-in-three chance that economic conditions worsen to a degree that affects the state's ability to maintain credit characteristics in line with the investment-grade rating level," said S&P analyst Geoffrey Buswick.

The negative outlook offers a longer-term view than a CreditWatch placement so the state has some time to navigate and react to the economic storm.

"The negative outlook reflects our anticipation that there is at least a one-in-three chance that economic conditions worsen to a degree that affects the state's ability to maintain credit characteristics in line with the investment-grade rating level," said S&P analyst Geoffrey Buswick.

“We will be watching to see if the stimulus as currently allocated is sufficient for Illinois to fight the COVID-19 pandemic; if the anticipated growth in the bill backlog does not create service delivery problems; and if the current market volatility worsens the funding status of the already poorly funded pension plans,” S&P said.

"The state of Illinois is committed to working through the difficult challenges brought on by COVID-19. The state prioritizes its debt payments and will ensure we stay on track through this crisis," budget and finance spokeswoman Carol Knowles said in a statement. "We are still looking at our revenue estimates. We are working closely with the Illinois Emergency Management Agency and Illinois Department of Public Health regarding their needs to address COVID-19 and we are working equally closely with the Comptroller and the Treasurer regarding bill payments. "

The recent federal relief package provides $2.7 billion in direct aid for Illinois and $2.2 billion for local governments for COVID-19 costs but not tax losses. Additional programs may provide relief for education, disaster and healthcare spending.

The state’s unpaid bill backlog stands at $7.8 billion.

“Due to the severity of this impact, and the significant additional challenges it poses to the state’s finances, further payment delays are to be expected in the coming weeks and months,” Comptroller Susana Mendoza, whose office pays the state’s bills, posted on the office’s website late last week.

S&P expects in the “intermediate term” further action will be needed to achieve sustainable structural balance and address pension liabilities to maintain an investment-grade rating.

“Our outlook revision also reflects our view that the COVID-19 pandemic's impact on the state's economy, budget, and forecast is a social rating factor elevating the public health and safety issues. If economic activity resumes, however, and credit metrics are upheld, we could revise the outlook to stable,” S&P said.

The shift marks the first rating action to sting the state as it scrambles to deal the public health crisis. Gov. J.B. Pritzker has warned multiple times during COVID-19 briefings that the ensuing toll on the state’s economy from the shutdown of business and lost sales and income tax revenue from job losses will require a major rewrite of the proposed fiscal 2021 budget that begins July 1.

The administration has not offered any fiscal estimates, saying the focus is on addressing the health, safety and welfare of the populace. The state announced 899 new cases Sunday, bringing the total positive case numbers to 11,256 including 274 deaths.

Illinois has about $28 billion of GO debt and $2.3 billion of sales tax backed Build Illinois bonds. The state has pension liabilities of $137 billion for a system 40% funded and a $57 billion unfunded other-post-employment benefits’ tab. Illinois is the weakest rated state and no sovereign state has ever lost its investment grade rating.

The rating action reverses the trajectory for the state as it credit stabilized over the last two-and-a-half years. Illinois’ GO fell out of AA territory in 2009 and entered BBB territory in October 2015 as growing deficits drove up the state’s bill backlog and the use of one-time maneuvers to fund operations triggered downgrades.

The steady stream of downgrades left the state with little room to weather a two-and-half year budget impasse during former Gov. Bruce Rauner’s term. The Republican governor and Democratic majority in the General Assembly butted heads over spending and policy issues driving up the state’s bill backlog to a record $16 billion and it further battered the state’s rating, leaving them at BBB, Baa3, and BBB-minus by Fitch Ratings, Moody’s Investors Service and S&P.

The impasse ended in July 2017 when a handful of Republicans joined Democrats to pass a budget and income tax hike. S&P had lowered the rating June 1, 2017 to BBB-minus from BBB and put it on CreditWatch with negative implications. After passage of the budget it removed the CreditWatch placement and the rating was affirmed and a stable outlook assigned.

It took another year for remaining negative rating pressures to ease. Moody’s in July 2018 revised the state’s outlook to stable from negative after passage of budget. Fitch moved its outlook to stable in July 2019.

Other Credits
S&P late Friday also affirmed the BBB rating on the state’s junior and senior Build Illinois bonds and revised the outlook to negative which “reflects our outlook change on the state of Illinois and the considerable revenue uncertainty during the COVID-19 pandemic," Buswick said.

“We will be watching to see when the social distancing measures are lifted; how quickly the tourism, event, and hotel businesses return to more normal levels; and to what extent the pledged revenues may be on a permanent new and lower growth trajectory,” S&P added.

Two other governmental agencies whose ratings are linked to the state and are struggling with their own loss of revenue were impacted.

S&P affirmed the Illinois Sports Facilities Authority’s BBB rating and shifted the outlook to negative on revenue uncertainty. The authority has about $400 million of debt outstanding repaid with hotel taxes with the state hotel tax subsidy subject to state appropriation.

“With so much of the state's consumer economy on hold, the baseball season looking limited at best, and hotels in the city of Chicago reported at 10% occupancy, the intermediate-term revenues are uncertain,” S&P wrote. “How quickly the economy recovers and to what level, coupled with the new projections for revenue flow to ISFA will be important credit characteristics considered in any future outlook or rating action.”

S&P affirmed MPEA’s $2.85 billion of debt at BBB and moved the outlook to negative. The agency collects taxes on hotels, restaurants, car rentals, and airport rental departures with a state sales tax pledge subject to appropriation backstopping the debt.

In more normal economic conditions, McCormick Place Convention Center provides an estimated almost $1.9 billion economic impact for the state and produces $151 million in direct annual state and local tax revenues.

“We will be watching to see trends in MPEA's operations and/or collection for the authority's tax revenues; when social distancing measures are lifted; how quickly the convention and hotel business returns to more normal levels; and to what extent the sales tax revenues may be on a permanent new and lower growth trajectory,” S&P said.

MetPier has seen 51 events, meetings, and conventions cancelled or postponed with 69% committing to return or reschedule, said spokeswoman Cynthia McCafferty. The total estimated attendance for the 51 events is 627,000 with estimated local economic impact of $895 million. Of the events not returning, the total estimated economic impact is $311 million.

“The change in rating outlook is unfortunate but not surprising in light of current circumstances. The authority believes the long-term fundamentals of its expansion project credit remain strong because of the coverage provided by state sales taxes,” said MPEA acting chief financial officer Jason Bormann.

The original version of this story was updated with a response from state officials.

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