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* My weekly syndicated newspaper column…
As I write this, two of the three national credit rating agencies have upgraded the State of Illinois’ rating in a week’s time. And the only remaining holdout owes us one. Bigtime.
As you know, Moody’s Investors Service upgraded its Illinois rating by a notch in late June, and S&P Global Ratings followed suit on July 8. Fitch Ratings is the only one left.
Back in April of 2020, when the pandemic was gripping the world, Fitch downgraded Illinois’ credit rating — the only credit downgrade Illinois has received since Bruce Rauner’s days as governor.
Just a month before, Moody’s and S&P, which had both lowered the state’s credit rating in June of 2017 (just before members of both parties in the General Assembly overrode Rauner’s tax hike veto), revised their outlooks on Illinois from “stable” to “negative,” but didn’t actually lower the state’s rating. Fitch’s previous ratings downgrade came in February of 2017.
“We are concerned with how the state is going to fare through what is clearly a significant economic dislocation,” a Fitch executive told Reuters in April of 2020.
At the time, the Illinois legislature was unable and unwilling to meet. The governor’s office was projecting a $7.3 billion hole in the FY 2020 and FY 2021 budgets and had undertaken a $1.3 billion cash flow borrowing program. Fitch also worried that the temporary measures Illinois was taking to deal with its budget shortfall would be difficult to unwind after the pandemic passed.
Almost nobody thought that Fitch was wrong about the future back then, even though the action seemed a bit too severe. A divided Congress and a Republican president’s open hostility to certain large-state Democratic governors who were also having budget problems made for a very bad situation.
Fiscal and political factorsBut then the federal government began the first of what turned out to be several economic and state and local government fiscal stimulus measures. Then there was a change in the U.S. Senate’s majority and the election of a Democratic president. Some very prudent Illinois budget moves, of both increasing annual revenues and keeping spending flat, all led to Illinois eventually emerging from FY21 with a budget surplus.
Indeed, state revenues for the just-concluded fiscal year (which ended June 30) finished $1.9 billion higher than the Governor’s Office of Management and Budget projected when the budget-makers were doing their business in May. The total was also $1.2 billion higher than projected in May by the legislature’s Commission on Government Forecasting and Accountability.
COGFA reported last week that, excluding borrowing, state receipts finished the fiscal year a “stunning $6.792 billion” above the previous fiscal year, which had included the long months of stay-at-home orders in response to the worldwide pandemic. Of that, net income tax receipts were up $5.6 billion. And only $1.3 billion of that was attributed to the shift of the income tax filing deadline from April 15 of last year (which was in Fiscal Year 2020) to July 15 of last year (Fiscal Year 2021).
State sales tax receipts grew $1.1 billion due to “strong consumer spending reflecting stimulus payments, improving job picture, and improved consumer confidence,” COGFA reported, and federal receipts were up $1.19 billion from Fiscal Year 2020. Tax revenue sharing with local governments grew by $442 million due to higher personal and corporate income tax receipts.
But this stark number stood out to me in the COGFA report: Revenues from the state’s inheritance tax grew by 59%, or $167 million, during Fiscal Year 2021. More than 23,000 Illinoisans have died so far during the pandemic. Notably, last month’s inheritance tax receipts were 14% below the same timeframe during the previous fiscal year as the pandemic’s impact has now tapered off. May’s inheritance tax receipts were down 7% and April’s were off by 37.5%. This year’s March receipts, however, were up 414% from March 2020, when the pandemic was just beginning.
As we’ve already discussed, the enormous amount of federal money pumped into the economy last year and this year contributed to the strong gains in income and sales tax receipts, here and everywhere else. The country’s mostly successful vaccination program also certainly helped, as many workers felt safe enough to return to their jobs.
But the hard truth is the state never came close to missing a bond or pension payment during the pandemic (or since the 19th Century, for that matter). Fitch’s prediction, while perhaps accurate during a time of great international crisis, proved to be false.
Mistakes can always be corrected. This one should be, too. Fitch owes us one.
* The Bond Buyer’s Illinois correspondent…
I love that @capitolfax raises the point in piece that gets forgotten in debate….that bond ratings are supposed to be gage of default risk.
Moody’s, S&P have upgraded Illinois’ bond rating. It’s time for Fitch’s to do the same https://t.co/ZemXwkuqds via @SunTimes— yvette.shields@arizent.com (@Yvette_BB) July 12, 2021
exactly why the high yield folks loved the Illinois credit over last couple years as market treated like junk …they'd say it's a sovereign state with sweeping fiscal powers, prepays debt service, and billions in non general fund surpluses can also go to cover debt service….
— yvette.shields@arizent.com (@Yvette_BB) July 12, 2021
Also, I love how the @SunTimes uses "Fitch's" in the headline. So very Chicago
— Rich Miller (@capitolfax) July 12, 2021
Yep.
posted by Rich Miller
Tuesday, Jul 13, 21 @ 3:37 am
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I hope going into the future this means the ratings agencies might be more forthcoming with upgrades. We’ve been owed one for awhile; whatever else you can say about our fiscal situation it’s dramatically better than the nadir of 2017. At some point fiscal prudence, eliminating the bill backlog, and mostly* (depending on actuarial standards) keeping up with pension payments has to count for something.
Comment by Nick Tuesday, Jul 13, 21 @ 3:53 am
Maybe Rauner and Tillman own an interest in Fitch…just sayin.
Comment by PublicServant Tuesday, Jul 13, 21 @ 6:37 am
I smell political bias here.
Comment by The Dude Abides Tuesday, Jul 13, 21 @ 11:16 am
Great read, Rich, and can’t agree more with Dave Lundy;
=== And the default risk is actually infinitesimal which makes one question the whole rating system of the three big rating services. Does anyone believe there’s even a one percent chance of default in the next say five or ten years?===
Good stuff, Dave.
To the post,
===But the hard truth is the state never came close to missing a bond or pension payment during the pandemic (or since the 19th Century, for that matter). Fitch’s prediction, while perhaps accurate during a time of great international crisis, proved to be false.
Mistakes can always be corrected. This one should be, too. Fitch owes us one.===
The generosity, and honesty to the mistake… the racket here needs a reset, and Rich makes the string case… make right, because not only was the prediction way off… the premise to it was wrong from jump street.
Comment by Oswego Willy Tuesday, Jul 13, 21 @ 3:33 pm