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Rating Action:

Moody's upgrades Illinois general obligation rating to Baa2 from Baa3; outlook stable

29 Jun 2021

New York, June 29, 2021 -- Moody's Investors Service has upgraded the State of Illinois's general obligation (GO) rating to Baa2 from Baa3. In connection with this action, ratings on Build Illinois sales tax revenue bonds were upgraded to Baa2 from Baa3, and annual appropriation bonds issued by the Metropolitan Pier and Exposition Authority Ratings were upgraded to Baa3 from Ba1. Total debt affected amounts to about $33 billion, including $27.7 billion of general obligation bonds, $3 billion of Metropolitan Pier and Exposition Authority bonds, and $1.9 billion of Build Illinois bonds. The outlook remains stable.

RATINGS RATIONALE

The upgrade of Illinois' GO rating to Baa2 from Baa3 is supported by material improvement in the state's finances. The enacted fiscal 2022 budget for the state increases pension contributions, repays emergency Federal Reserve borrowings and keeps a backlog of bills in check with only constrained use of federal aid from the American Rescue Plan Act. Illinois still faces longer-term challenges from unusually large unfunded pension liabilities, which are routinely shortchanged under the state's funding statute. These liabilities could exert growing pressure as the impact of federal support dissipates, barring significant revenue increases or other fiscal changes.

Build Illinois senior-lien sales tax revenue bonds rated Baa2 benefit from strong debt service coverage provided by available statewide sales tax collections, although actual coverage from funds transferred for debt service is far narrower. Additional issuance of senior Build Illinois bonds is subject to a requirement that maximum annual debt service (MADS) not exceed 5% of the most recent year's available sales tax receipts. The scale and breadth of the sales tax, combined with the leverage constraint, will help maintain a buffer against revenue loss. Lack of separation of sales tax revenue from general state operating needs, however, means the credit is not superior to the state's GO, despite its strengths.

The Baa3 rating on the Metropolitan Pier and Exposition Authority's bonds is supported by the state's commitment to provide funds for debt service when pledged taxes on Chicago-area meals, hotel stays and other tourist activity is insufficient. The state has ample ability to cover debt service from the sales tax revenue allocated to the bonds, but timely payment only occurs with annual appropriations by the state legislature. A legal structure that makes monthly transferal of state sales tax revenue automatic provides strength, despite the need for annual legislative approval for payment of debt service and the less-essential nature of the financed facilities (the McCormick Place convention center).

RATING OUTLOOK

The stable outlook indicates the state's capacity to manage near-term fiscal pressures while carrying a heavy long-term liability burden.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

-Enactment of recurring financial measures that support sustainable budget balance

-Decisive actions to improve funding of the state's main pension plans

-Improvements to the state's governance profile, such as constitutional or legal changes, that are likely to have a lasting effect

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

-Fiscal measures that substantially add to the state's near- or long-term liabilities, including reductions in pension contributions to provide fiscal relief

-Growing structural imbalance that leads to significant increase in the state's unpaid bills or other liabilities

-Substantial assumption of debt or pension liabilities accrued by local governments

LEGAL SECURITY

The GO bonds are supported by the state's full faith and credit pledge, pursuant to the state's General Obligation Bond Act (30 ILCS 330/17). The law provides for an "irrevocable and continuing appropriation" of state funds for payment, creates a debt service fund (the GO Bond Retirement and Interest Fund), requires monthly deposits into that fund and mandates the use of any state funds, if necessary, to cover a shortfall in such deposits.

Build Illinois bonds are backed by pledged revenue derived primarily from the state's sales tax collections. The bonds are payable specifically from the sales tax and other revenue transferred for debt service into funds created under the bonds' 1985 indenture.

For bonds issued by the Metropolitan Pier and Exposition Authority, payments are subject to annual legislative appropriation. Certain taxes on Chicago-area tourism activities (such as hotel stays and car rentals) are dedicated, and revenue from the state's sales tax offsets shortfalls in amounts needed for debt service.

USE OF PROCEEDS

Not applicable.

PROFILE

With 12.8 million residents, or about 3.8% of the nation's total, Illinois ranks sixth by population among US states, according to the 2020 US Census. The state's gross domestic product -- $863.5 billion in 2020 -- ranked fifth and accounted for about 4.1% of total US economic output, according to the Bureau of Economic Analysis.

METHODOLOGY

The principal methodology used in the general obligation ratings was US States and Territories published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1084466. The principal methodology used in the lease ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments Methodology published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1274696. The principal methodology used in the special tax ratings was US Public Finance Special Tax Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260087. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edward Hampton
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Nicholas Samuels
Additional Contact
State Ratings
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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