Fitch removes state from Rating Watch Negative, explains what could trigger downgrade

Fitch has removed the state’s IDR {Issuer Default Rating} and related ratings from Rating Watch Negative and assigned a Negative Outlook.

KEY RATING DRIVERS

The affirmation of Illinois’ ratings follows the passage of a fiscal 2018 budget that incorporates a permanent increase in taxes to more closely align revenues with spending and that should significantly reduce the near-term liquidity stress that had threatened the state’s investment-grade rating. The state’s financial resilience has been materially weakened by the two-year period in which it spent far in excess of tax revenues while accumulating an extraordinary level of budgetary liabilities, adding to the strain presented by the state’s unfunded retiree benefit liabilities and rising contribution burden. These factors result in a rating well below the level that the state’s solid economic base and still substantial independent legal ability to control its budget would support. The Negative Outlook reflects the uncertainties related to successful implementation of the budget, particularly given the contentious political environment in the state. These risks include reducing the accounts payable backlog in the near term, including by coming to market with bonds that were authorized in the budget; completing the sale of a state building assumed in the budget; meeting revenue targets in a slow growth environment; and achieving near-term pension contribution savings, partly at the expense of worsening the state’s long-term liability picture.

Economic Resource Base

The state benefits from a large, diverse economy centered on the Chicago metropolitan area, which is the nation’s third largest and is a nationally important business and transportation center. Economic growth through the current expansion has lagged that of the U.S. as a whole.

Revenue Framework: ‘aa’ factor assessment

Illinois’ broad revenue base, primarily income and sales taxes, captures the diversity in its economy and has shown modest growth since the end of the recession. Fitch expects revenue performance to continue to track slow economic growth. The state has unlimited legal ability to raise revenues.

Expenditure Framework: ‘a’ factor assessment

Illinois has adequate expenditure flexibility despite elevated carrying costs for debt service and retiree benefits, with much of the broad expense-cutting ability common to most U.S. states. Contribution demands associated with retiree benefits will continue to be a pressure as these benefits are constitutionally protected. Further, a recent federal court ruling that limited the state’s ability to defer Medicaid spending poses some concern about the extent of the state’s budgetary control, although Fitch believes that the ability of the court to make such a mandate remains subject to challenge.

Read more: https://capitolfax.com/2017/07/17/fitch-removes-state-from-rating-watch-negative-explains-what-could-trigger-downgrade/