Muni Bond Upgrades: Illinois’ Improving Credit Quality
May 04, 2023
Read Time 2 MIN
Over the past four years, Illinois’ improved budgets and fiscal responsibility resulted in several upgrades for Illinois. Long known as the weakest state, initiatives under Governor Pritzker’s leadership have put the state on a stronger path. As one of five states whose political subdivisions issue the most municipal bonds year over year, Illinois’ recent improvements are significant and welcome news for the asset class. These developments demonstrate that the credit quality of municipals will likely remain healthy.
Balancing Budgets and Restoring the Budget Stabilization Fund
A key victory for the state, Illinois has achieved near-balanced budgets. This is a departure from its history of using one-time revenues and deferring bills to cover expenses. The new $50 billion budget for fiscal year 2023 anticipates the state pushing off just $1 billion of its bills due—a significant reduction from the $8 billion backlog the Governor inherited according to Illinois Office of Management and Budget. In addition to a more balanced budget, the state is restoring the Budget Stabilization Fund, a financial cushion, or “rainy day fund,” that should protect the state from unexpected expenses or revenue shortfalls. In addition to depositing available funds in FY2021 and FY2022, the state has created permanent revenue streams to add to the Fund over time, according to The Illinois Office of Management and Budget.
| 2019 | FYE 2023 | |
| Bills Outstanding | $8 billion | $1 billion |
| Budget Stabilization Fund | $60,000 | $1.9 billion |
| Pension Funded Ratio | 40.3% | 43.8% |
| S&P/Moody’s/Fitch | BBB-/Baa3/BBB | A-/A3/BBB+ (positive outlook) |
Source: The Illinois Office of Management and Budget, as of current estimate, FYE 2023.
Addressing Illinois’ Pension Fund Challenges
While Illinois’ pension challenges are severe and will take decades to fix, we are now witnessing an improvement in the funding levels and concrete plans to reach a sustainable level in 20 years. Success in this area will take consistent discipline.
We are encouraged by the direction the state is forging. To us, the overarching theme is “willingness”: a virtue the state has struggled with in the past. Now we see excess funds saved instead of spent, a focus on balanced spending, and long-term planning. These factors indicate a state better equipped to navigate its future and provide a strong home for its residents.
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IMPORTANT DISCLOSURES
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this email.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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IMPORTANT DISCLOSURES
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this email.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.