Fitch keeps Illinois’ credit above junk but negative outlook remains
Of the three major ratings agencies, only Moody’s Investors Service has indicated that Illinois lawmakers’ lack of long-term solutions for reducing that debt is a severe problem.
Fitch Ratings released a decision July 17 affirming Illinois’ BBB credit rating, which is just two notched above junk.
The firm also improved Illinois’ credit outlook to “Negative Outlook” from “Rating Watch Negative,” meaning there is a reduced chance of a downgrade from Fitch in the immediate future. However, the firm could still downgrade Illinois sometime in the next one to two years.
Fitch said it was removing Illinois from its watch list because it enacted a budget after three years of financial and political impasse.
The agency stated that the budget’s 32 percent income tax increase will more closely “align revenues with spending” and that this should “significantly reduce the near-term liquidity stress.”
Fitch indicated that the future status of the state’s credit rating depends on its ability to maintain a balanced budget over multiple years. Other concerns include mounting bills, the state’s slow economic growth and the lack of “structural action on the expenditure side” of the budget.
Illinois’ massive debts
Fitch, Standard & Poor’s and Moody’s Investors Service all agree that Illinois’ massive pension debt and its pile of unpaid bills are the state’s most pressing crises.
According to Moody’s, Illinois has $250 billion in unfunded pension debts, far higher than the $130 billion the state says it owes. In addition, the state officially owes $57 billion in retiree health care debt and nearly $30 billion in general long-term debt.
However, of the three major ratings agencies, only Moody’s has indicated that lawmakers’ lack of long-term solutions for reducing that debt is a severe problem.
S&P and Fitch have both decided to pull back their threat of a junk rating. By doing so, they have rewarded lawmakers for passing a budget that places a heavier burden on taxpayers while avoiding spending reforms.
Rather than increasing the tax burden on Illinoisans, legislators should have passed a balanced budget that reforms the state’s broken systems and implements solutions to the state’s structural problems without increasing taxes.
That’s what Illinois needs to avoid junk and insolvency; not another short-term budget deal.