Moody’s Ratings on Monday revised Illinois’ outlook to positive from stable. The rating agency also affirmed the state’s A3 issuer rating and the A3 rating on Illinois’ general obligation debt and Build Illinois sales tax bonds. It assigned a rating of A3 to $1.8 billion of forthcoming Illinois GO bonds.

The new bonds include $250 million of GO bonds, taxable Series 2024A; $1.5 billion of GO bonds, Series 2024B; and $50 million of GO bonds, Series 2024C, according to Moody’s. The Series 2024A bonds will go toward accelerated pension benefits payments through the state’s pension buyout program. The Series 2024B and 2024C bonds will go toward Rebuild Illinois capital construction projects.

Moody’s also affirmed its Baa2 rating on the state’s Metropolitan Pier and Exposition Authority bonds, which are partially funded with state appropriations.  

Illinois Gov. JB Pritzker. Rating agencies “have taken notice” of the governor’s five balanced budgets, efforts to pay off debt and increases in the state’s rainy day fund, Pritzker spokesperson Jordan Abudayyeh said.

Bloomberg News

The rating agency said the positive outlook revision reflects ongoing improvement in the state’s fund balance and budget reserves and stable revenue, among other things. 

“It’s clear that it is a new day in Illinois and rating agencies have taken notice,” said Jordan Abudayyeh, deputy chief of staff for communications for Gov. JB Pritzker. “Five balanced budgets, paying off debt and increasing the state’s rainy day fund has led to nine credit upgrades. The governor and his partners in the General Assembly have dedicated themselves to ensuring Illinois can invest in its people… in a fiscally responsible way.” 

Abudayyeh added, “As the state’s economy has grown, excess revenues have been allocated wisely, and the governor looks forward to passing another balanced budget in a month.”

In his proposed fiscal 2025 budget, Pritzker outlined a plan to bring the state’s statutory pension funded ratio goal to 100% funded rather than the current 90%, and to make additional contributions to state retirement systems when legacy debts are paid off, Abudayyeh noted.

Fitch Ratings upgraded Illinois’ issuer default rating to A-minus with a stable outlook in November. S&P Global Ratings likewise assigns the state’s GO bonds a rating of A-minus, upgraded from BBB-plus in February 2023. KBRA in January rated the state’s Build Illinois bonds AA-plus and affirmed its long-term rating of AA-plus on the state’s parity Build Illinois bonds. The outlook is stable.

Moody’s praised the state’s moves to “shore up financial health,” such as directing surplus revenue toward incrementally increasing fund balance and budget reserves.

“Both total fund balance and budget reserves have reached levels the state has not held for at least 15 years,” Matthew Butler, vice president and senior credit officer at Moody’s, told The Bond Buyer. 

However, Moody’s predicted high leverage for the foreseeable future, and pointed out that Illinois has the largest leverage ratio of all U.S. states (with long-term liabilities over 500% of revenue in 2022) and one of the weakest fund balance ratios (with available fund balance just above 10% of revenue in 2022). 

The rating agency said an upgrade could occur if liabilities dip below 400% of revenue and fixed costs are kept below 20% of revenue.

“We estimate ratios just higher than these as of June 30, 2023 – a liabilities ratio of about 410% or revenue and fixed costs of about 23% of revenue,” Butler said.

Illinois has a diverse economic base with resident income above the national average, Moody’s said, and it enjoys healthy, stable liquidity across governmental funds. 

But there are weaknesses in its population trend – “likely explained by the general U.S. migration pattern of people moving southeast and southwest, which itself is at least partly tied to the growing labor markets and lower costs of living in those areas,” Butler said. That trend could prove a drag on economic growth looking ahead.

Illinois’ pension contribution practices also “remain weak, relative to more highly rated U.S. states,” Moody’s said in its report.

Long-term liabilities and fixed cost burdens, mostly from unfunded pension liabilities, will probably remain the highest among U.S. states for some time into the future, the rating agency said. And while it has recovered somewhat recently, fund balance remains among the weakest of all states as a share of revenue. 

Still, the upward revision to the state’s outlook shows it’s possible that, with stable state revenue and growing fund balance and reserves, the state could see an upgrade to its credit rating in the future. 

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