A dwindling backlog of unpaid bills and budget proposals that bolster a meager rainy-day fund and supplement pension contributions bolster Illinois’ case for rating upgrades, Comptroller Susana Mendoza says in a letter to rating agencies.
“I believe Illinois should be recognized for our current accomplishments and our plans to further strengthen our financial position, and I believe these are strong indicators that support Illinois’ credit score improvement,” says the letter from Mendoza.
Illinois has the lowest ratings of any state: Baa2 from Moody’s Investors Service, BBB from S&P Global Ratings, and BBB-minus from Fitch Ratings.
Mendoza highlighted the early repayment in January of the three-year, $2 billion Municipal Liquidity Facility loan taken out in December 2020 and plans to repay the remaining $719 million in short-term interfund borrowing used to manage COVID-19. expenses by the end of fiscal year 2022 on June 30.
Illinois reduced its backlog of bills to $3 billion last year and it has held steady. “The fact that Illinois has remained stable in paying its bills should help ease concerns that the reduced amount of backlog was only a temporary accomplishment,” said Mendoza, whose office manages the payment of bills, in the letter to the rating agencies.
The backlog hit an all-time high of over $16.7 billion in 2017 due to the state’s two-year budget stalemate.
Mendoza then turns to Governor JB Pritzker’s budget proposals, which earmark some of the higher-than-expected tax revenue to fund an additional $500 million pension contribution and $1.3 billion to pay the bills. This includes $898 million to pay off backlog bills related to employee and retiree health insurance, which would allow the state to meet a routine billing cycle.
“As you know, the governor’s plan aims to improve the state’s structural fiscal challenges with his group insurance program and state pensions,” Mendoza wrote in the Feb. 4 letter, released Monday, to the Illinois leading analysts at Fitch Ratings, Moody’s Investor Services and S&P Global Ratings.
Pritzker would also deposit $879 million into the state’s empty rainy day fund.
Mendoza sent a similar pitch to rating agencies in July at the start of the fiscal year, providing analysts with an update shortly after Moody’s Investors Service upgraded the rating from Baa2 to Baa3 in June.
S&P Global Ratings followed Moody’s later in the summer in raising the state’s rating from BBB-minus to BBB. Fitch changed its outlook from negative to positive, but left the rating at BBB-minus. Late last year, S&P then downgraded the outlook for the state to positive. Moody’s assigns a stable outlook.
Mendoza also noted the state’s improving market performance as a sign that investors view the state as rising. The state captured the smallest yield penalties — a 54 basis point spread from Municipal Market Data’s AAA benchmark over its 10-year run — in recent memory with its November issue.
Investors attribute this more to market demand last year for higher-yielding paper and the cushion provided by the $8 billion US funding of the American Rescue Plan Act than to any long-term endorsement of the fiscal health of the state.
In the secondary sector, the 10-year government posted a spread of 63 bp compared to the AAA at the start of the year. It widened to 68 basis points at the end of January and reached 71 basis points in more difficult market conditions.
Pritzker’s proposed budget last week drew positive remarks from ratings agencies in analyst interviews with The Bond Buyer, but it remains unclear how soon these measures, if passed, could trigger positive rating actions and whether they can earn upgrades on their own.
“There are certain proposals in the executive budget that clearly target the state’s biggest credit challenges,” said Eric Kim, Fitch’s principal Illinois analyst.
Analysts praised but warned that Pritzker’s proposals are far from final and that their eyes also remain on the state’s long-term trajectory, a signal that the state faces hurdles to climb the ratings ladder unless it does more to meet its unfunded $139.9 billion. retirement commitments.
While the Pritzker administration has called its budget balanced, it is on a cash basis, and analysts have said more scrutiny is needed before assessing the structure of the budget. They also note that the additional pension contributions from the budget are still well below the funding of pensions based on actuarial calculations.
Both Pritzker and Mendoza are Democrats seeking re-election in November.