Illinois 2019A-B GO Bonds Assigned 'BBB-' Rating; Other GO Ratings Affirmed


CHICAGO (S&P Global Ratings) March 14, 2019--S&P Global Ratings assigned its 
'BBB-' rating to Illinois' $300 million in general obligation (GO) taxable 
bonds, series April 2019A, and $155 million in GO bonds, series April 2019B. 
At the same time, we affirmed our 'BBB-' ratings on the state's outstanding GO 
debt.

We also affirmed our 'BB+' ratings on the state's appropriation-backed debt. 
This includes Chicago's outstanding motor fuel tax revenue bonds and the 
Illinois Sports Facilities Authority bonds, supported by a share of hotel tax 
revenues and other amounts allocable to the city of Chicago under the state 
revenue sharing act. These bonds are subject to appropriation and, in our 
view, have strong political and administrative support. In the case of 
Chicago's fuel tax bonds, we view the state's engagement as moderate, though 
it benefits from a strong payment source. Finally, we affirmed our 'BB-' 
ratings on the state's moral obligation-backed debt. We evaluated the moral 
obligation debt outstanding and determined there was moderate relationship 
between the state and the projects that the bonds financed. However, we view 
the moral obligation-backed debt as having potentially weaker political 
support if the state is called on to support the debt, particularly given the 
current budgetary environment. The outlook on all the debt ratings is stable.

The series 2019A bonds will finance accelerated pension payments. The series 
2019B bonds will refinance certain outstanding GO bonds for interest cost 
savings. 

"The 'BBB-' GO rating reflects our view of the state's lack of budget reserve 
and generally weakened financial condition that has potential to intensify 
into liquidity stress, and lingering structural budget imbalance, even after a 
permanent increase to the state's individual and corporate income tax rates," 
said S&P Global Ratings credit analyst Carol Spain. Other factors include the 
state's:
Backlog of unpaid bills that remains elevated, even following the state's 2017 
bond refinancing of a portion of them;
Distressed pension funding levels that will require substantial contribution 
increases in the coming years; and
Elevated fixed costs and propensity to experience political dysfunction, 
resulting in a generally heightened vulnerability to unanticipated exogenous 
stress, from either an economic downturn or a withdrawal of expected federal 
funding.

For more information on the state's general creditworthiness, please refer to 
our full analysis on Illinois, published Aug. 8, 2018, on RatingsDirect.

"The stable outlook reflects our view that Illinois' likelihood of 
experiencing a liquidity crisis in the near term has subsided and therefore, 
so have the odds of its rating falling below investment grade," added Ms. 
Spain. Despite the current bill backlog and estimated deficit to end fiscal 
2019, we anticipate that the state will retain sufficient cash flow to provide 
coverage of all core payments. In our view, the proposed seven-year extension 
of the pension plans' amortization alone weakens the state's pension funding. 
However, it remains possible that an asset transfer or passage of an income 
tax increase within the outlook horizon could offset what we would otherwise 
view as weak budgetary practices proposed in the fiscal 2020 budget. 
Additionally, we do not expect see a re-emergence of heightened political 
dysfunction but rather anticipate that the budget process will be more timely 
and constructive. The state's strong bond payment provisions also offer some 
downside insulation to the state ratings. The current GO rating incorporates 
our view of the state's longer-term vulnerabilities and remains the lowest 
possible rating within the investment-grade categories.

Illinois' liquidity position is paramount to the rating. Downward rating 
pressure would likely ensue if Illinois' bill backlog continues to climb or 
its liquidity position weakens to a level that jeopardizes its ability to 
timely finance core government services. Particularly given the state's high 
fixed costs, depleted reserves, and prioritization of government services, we 
believe it has minimal cushion to weather a recession or other unrealized 
budget assumptions. If unaddressed, we expect that wider-than-currently 
forecasted budget gaps would likely exacerbate the state's already strained 
liquidity. Given its tenuous fiscal position, near-term progress toward 
resolving its ongoing structural imbalance is critical to maintaining our 
investment-grade rating. If Illinois is unwilling or unable to pass a revenue 
increase within the next two years, absent significant expenditures cuts, we 
would likely lower the rating. Other key sources of potential downward rating 
pressure include further measures to reduce annual pension contributions, 
recognition of asset transfers in a way that undermines pension funding, and 
substantial growth in the state's debt burden.

That said, Illinois' credit rating is uncommonly low among the states, 
reflecting a confluence of its daunting long-term liability profile and 
persistent crisis-like budget environment in recent years. Any upside to its 
credit quality, however, remains constrained by its poorly funded pension 
systems and other outsized liabilities. But even with these, the state's 
economic base could support a higher rating pending improvement in its fiscal 
operations and overall budget management. If Illinois were to make sustainable 
progress toward structural balance, reducing its bill backlog, and growing 
reserves, we could raise the rating. 
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