Illinois notched its first bond rating upgrade in over two decades Tuesday, but the Wall Street agency handing it down warned of long-term challenges that could put pressure on the state as federal COVID-19 relief dollars dissipate.
Moody’s Investors Service issued the upgrade, to Baa2 from Baa3, and gave the state’s general obligation bond outlook a stable rating because of “material improvement in the state’s finances,” according to the agency’s news release.
“The enacted fiscal 2022 budget for the state increases pension contributions, repays emergency Federal Reserve borrowings and keeps a backlog of bills in check with only constrained use of federal aid from the American Rescue Plan Act,” the agency said in its ratings rationale.
Gov. J.B. Pritzker, the state’s Democratic legislative leaders and others applauded the upgrade.
“Make no mistake, despite all the challenges of the last year, after eight credit downgrades our state suffered under my predecessor, I say with full certainty Illinois fiscal condition is heading in the right direction for the first time in the 21st Century,” the governor said at a hastily called Springfield news conference.
But the Wall Street rating agency tempered the news.
“Illinois still faces longer-term challenges from unusually large unfunded pension liabilities, which are routinely shortchanged under the state’s funding statute. These liabilities could exert growing pressure as the impact of federal support dissipates, barring significant revenue increases or other fiscal changes.”
The agency also upgraded ratings for the Metropolitan Pier and Exposition Authority from Ba1 to Baa3 based on the state’s support. Build Illinois bonds were upgraded to Baa2 from Baa3.
A state’s bond rating is a way to measure its credit quality — a higher bond rating generally means the state can borrow at a lower interest rate.
Illinois’ rating had hovered at an investment grade level just above “junk bond” status.
Pritzker said Moody’s decision marks a “third major milestone in a triumvirate of fiscal progress” after downgrades under his Republican predecessor Gov. Bruce Rauner.
“This monumental development from Moody’s Investor Service recognizes the depth of our efforts to reverse the damage of the past,” Pritzker said. “While our journey to solve all of Illinois’ fiscal challenges continues, today’s news proves that when it comes to positive change in Illinois — we are well on our way. After the most difficult year in memory, Illinois is making a major comeback.”
State Senate President Don Harmon said in a statement that “stability and responsibility produce results.”
“You don’t need to ruin people’s lives to have sound fiscal policies and positive outcomes,” Harmon said.
The Oak Park Democrat thanked Pritzker and state House Speaker Emanuel “Chris” Welch for their “teamwork in helping us find a better way forward.”
Welch said in a statement the improvement is “thanks to responsible and balanced budgets” and the upgrade is “yet another example that we can support all Illinois families, invest in our communities, provide high-quality state services to those in need, all while improving our fiscal health.”
State Comptroller Susana Mendoza said in a statement she “couldn’t be happier that our hard work is producing results” such as the ratings upgrade, which will mean “lower costs for Illinois taxpayers.”
Laurence Msall, the president of the Civic Federation, said the governor deserves credit, but the state is not yet out of the woods.
“From a fiscal analysis standpoint, this is positive news — it’s reflective of a more conservative budget approach that he has taken in the last year,” Msall told the Sun-Times. “It’s a step in the right direction, but much heavier lifting, and much harder work is needed, if we’re going to move from being barely investment grade to an A-rated credit or ideally a double A or triple A, which 13 other states are.
“And if we were to improve to A-rated credit, or better, the cost on the government would drop dramatically because the cost of government borrowing would drop dramatically.”
Pritzker hasn’t confirmed that he’s seeking another term, but he is expected to do so soon. Whenever that decision is made, the ratings upgrade, the passage of the state’s budget and reduction in its bill backlog, as well as other recent credit action, would likely be victories he points to on the campaign trail.
Last week, Wall Street credit rating agency Fitch Ratings upgraded Illinois’ rating outlook from negative to positive, a move it said reflects the state’s “preservation of fiscal resilience” and “sustained economic recovery” since the start of the pandemic.
Fitch Ratings pointed to the state’s economic recovery as well as the “unwinding of certain nonrecurring fiscal measures” as reasons for the change in outlook, though it affirmed its actual issuer default bond rating of BBB- — an “investment grade” ranking just one notch above “junk bond” status.