By Greg Bishop (The Center Square)
A major U.S. credit rating agency sees a mild recession ahead and while Illinois’ public finances are expected to remain stable, the state will perform poorer than other states.
Fitch Ratings released its sector outlook for state and local governments and it expects the economic conditions countrywide to deteriorate in 2023. But, the group “anticipates credit quality will remain stable and strong given governments’ prudent efforts in recent years to bolster financial resilience.”
“Robust reserves, in many cases exceeding pre-pandemic levels, as well as other prudent budget management measures, leave state and local governments well positioned to face this economic weakness,” the report said.
A key driver for that was federal tax dollars used as direct aid to states. Illinois public and private sectors got more than $160 billion from federal taxpayers since the beginning of the pandemic.
Fitch analyst Eric Kim said the national outlook means the macro conditions facing state and local governments are going to be weaker with a mild recession ahead. But, he said credit ratings will remain stable, even for Illinois.
“They’ve made some real strides in terms of improving their resilience and the tools that they have available to them to deal with downturns like the one that again we expect to come next year,” Kim told The Center Square. “But there’s obviously a long way to go.”
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Illinois has the worst credit rating in the country and with among the largest public employee retirement costs in the country, is expected to perform worse than other states better positioned financially.
“It is fair to say that Illinois is going to face a tougher situation than most other states given its rating level,” Kim said.
This is despite Illinois’ plans to fund the state’s public employee pensions to 90% by 2045.
“That in our view is not fully addressing the liability and the state is going to continue to be in this position until it’s able to really make progress on that particular front,” Kim said.
Regardless, Kim expects Illinois with a stable outlook will maintain its rating level by securing modest rainy day funds.
For Chicago, Fitch analyst Michael Rinaldi said the city continues to be an outlier, but has reserves and broad taxing authority.
“The city is somewhat more highly dependent on revenues that tend to be quite sensitive to economic conditions,” Rinaldi told The Center Square.
Regardless, Rinaldi said Chicago’s credit outlook remains positive.
Things to watch for, the Fitch report indicates, are the possibilities of a deeper and prolonged recession leading to deferrals of pension funding and payment delays, sharp drops in housing prices driven by continued aggressive Federal Reserve monetary policy tightening, strained growth in key economic indicators, substantial and widespread public sector labor market challenges putting pressure on expenditures, and new political leadership in some states charting radical new courses in fiscal management practices.
Syndicated with permission from The Center Square.