WASHINGTON – Among the states that begin their fiscal year July 1, Illinois and Pennsylvania are the only two with a negative rating outlook, Fitch Ratings said Tuesday.

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Illinois (triple-B negative) is among only three states out of the 42 that Fitch rates that are below double-A. The other two are Connecticut (A-plus stable) and New Jersey (A,stable).

“The majority of U.S. state rating outlooks are stable and expected to remain so,” the report said.

Hawaii is the only state with a positive rating outlook from Fitch.

Most states have enacted or are finalizing their 2019 budgets for the fiscal year that starts July 1.

New York, which begins its fiscal year April 1, enacted its budget on time this year. Texas will begin its fiscal year Sept. 1. The two remaining states – Alabama and Michigan – begin their fiscal year Oct. 1.

States generally are in better fiscal condition than a year ago, the National Association of State Budget Officers reported last week in its spring edition of the Fiscal Survey of the States.

Only nine states reported making mid-year budget cuts, for a total of $830 million this year, compared with 22 states that cut $3.5 billion in 2017, NASBO said.

States are experiencing revenue growth averaging 4.9% and their governors have proposed spending increases averaging 3.2% in the coming fiscal year.

“It certainly has been a less contentious year for state budgeting,” Laura Porter, managing director of Fitch said in an interview. “There’s a variety of reasons for that, but certainly because the revenue picture has been pretty good. You’ve seen both natural growth and the benefit of the federal tax changes because of the linkages between the federal and state tax codes.”

Porter said states continue to face long-term fiscal pressure, though most “are well-positioned” to handle them.

Illinois is atypical, Porter said, because of its “very significant structural problems.”

Fitch rates state governments on four key factors: revenue framework, expenditure framework, long-term liability burden and operating performance.

Illinois’ operating performance “has been very weak,” Fitch said, “both during the Great Recession and in this subsequent period of economic growth.”

On the plus side, Illinois is in “closer alignment of revenues with current spending in the current-year budget with passage of a permanent tax increase was a positive step,” the report said. “Negatively, structural balancing actions on the expenditure side were limited. The state will be challenged to rebuild its financial resilience, given the persistence of a sizable accounts payable backlog.”

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