Moody’s gives Illinois second credit upgrade within one year
Move means lower interest costs, but rating remains lowest of all states
Illinois on Thursday received its second credit rating upgrade from Moody’s Investors Service within one year, moving up one notch but remaining in the worst shape of the 50 states.
It’s the third upgrade between the three major credit ratings agencies during Gov. JB Pritzker’s tenure, the other coming last year from Standard & Poor’s shortly after the first Moody’s upgrade.
The upgrade to Baa1 status, or three notches above what is referred to as “junk bond” status, reflects “solid tax revenue growth,” which allowed the state to bolster financial reserves and increase payments toward unfunded liabilities, according to Moody’s.
The upgrade to the general obligation bond rating likely means lower interest costs when the state borrows money.
“A credit upgrade means Illinois will likely pay a lower interest rate, saving taxpayers hundreds of millions of dollars in the coming years,” Pritzker said in a news conference called after the Moody’s announcement. “Higher credit ratings result in the elimination of wasteful spending, and they mean that we will have more resources for education, for health care, public safety and future tax breaks.”
Pritzker credited the upgrade to the recently passed $46 billion state operating budget, and the fact that the state dedicated an added $500 million to its pension system and retired $900 million in other interest-accruing health insurance debts.
The pension investment is expected to reduce unfunded liabilities in the pension system by about $1.8 billion. At the end of 2021, the Commission on Government Forecasting and Accountability pegged that unfunded liability at about $130 billion.
While the pension investment indicated an “increased commitment to paying its single-largest long-term liability,” according to the report, the remaining liability precluded a more substantial upgrade.
“The rating balances the state's recent financial progress with underlying challenges that will remain in place for some time,” the Moody’s report stated. “These challenges include heavy long-term liability and fixed cost burdens that constrain the state's financial flexibility and contribute to a weak financial position compared to other states, despite the recent improvement in fund balance.”
As well, the report noted, Illinois’ economy has routinely expanded at a slower pace than the nation at large in recent years, as evidenced by its 4.7 percent March unemployment rate compared to a 3.6 percent rate nationwide rate.
Moody’s also credited the state for bolstering its fund balances.
The budget dedicated $1 billion to the state’s “rainy day” fund and created an ongoing $3.75 million monthly contribution to the fund beginning in July 2023. The state also dedicated $230 million to paying down the unfunded liabilities of its College Illinois program.
Those actions also mean millions of dollars of interest payments will be freed for general revenue funds spending.
Still, there are reasons to be cautious, according to the report.
“The stable outlook balances the financial progress being made by the state with the uncertainty of the present economic climate,” the report stated. “The state's lean financial reserves, and heavy long-term liability and fixed cost burdens make it more vulnerable than other states to a negative shift in the national or global economy, which presently limits the probability of further rating improvement.”
Moody’s noted Illinois could see a further upgrade if fund balances continue to improve in future budget years, economic expansion accelerates, if the state continues to moderate its long-term liabilities, and if it continues on a path of growing reserves and increasing pension payments.
Downgrades could follow if revenue growth slows, unfunded liabilities grow, fund balances decrease, or if the state departs from “fiscal management practices” of building fund reserves and increasing pension contributions.
In February, Pritzker’s Department of Revenue testified in a committee presentation that much of almost $5 billion in unforeseen state revenue growth for the current fiscal year was a result of pandemic-related shifts in consumer spending and other federal aid, either directly or indirectly.
That was largely driven by increases to the state’s personal and corporate income taxes, as well as sales taxes, as consumers purchased more taxable goods than untaxed services amid the COVID-19 pandemic. Increased federal unemployment benefits played a role as well.
IDOR warned of a revenue slowdown at that committee hearing and Pritzker said the budget for the upcoming fiscal year anticipates one.
“We lowered our revenue estimates for the state because we know that the economy of Illinois can't grow at 5.7 percent or 6 percent every year. That's not going to happen,” he said. “That was an unusual year. We were coming out of, we still are coming out of a pandemic. But significant infusions into the economy by the federal government all across the nation. But we do expect growth in the state and we have planned for a lower level of revenue and as a result lower spending to meet the revenue that we've got.”
Comptroller Susana Mendoza, a frequent critic of former Gov. Bruce Rauner who presided over eight credit downgrades between the three major agencies, said the state began making fiscal progress prior to the direct receipt of federal funds.
An unpaid backlog of bills overseen by the comptroller’s office that once reached nearly $17 billion under Rauner now sits within a 30-day billing cycle from the date vouchers are received by the comptroller’s office.
“I knew that through our smart fiscal management, this upgrade was on the horizon,” Mendoza said in a statement. “This is not by chance. Even before a penny of American Rescue Plan Act (ARPA) federal stimulus dollars came to Illinois, the Illinois Office of Comptroller methodically paid down the state’s bills and shortened the bill payment cycle.”
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