July 19, 2018 / 10:33 PM / a year ago

Moody's rating outlook revision pulls Illinois from edge of junk

CHICAGO, July 19 (Reuters) - Moody’s Investors Service on Thursday suspended Illinois’ potential descent into junk territory by revising the outlook on the state’s credit rating to stable from negative.

The credit rating agency affirmed Illinois’ Baa3 general obligation rating, which is just a notch above junk, and gave the fiscally challenged state its first stable outlook since December 2012.

“While we still see the long-term pressures building on the state in the absence of a comprehensive pension plan, the view here is that at least for the next couple of years the state can essentially hold its ground,” said Moody’s analyst Ted Hampton.

Illinois’ financial picture improved with the enactment last year of an income tax rate hike and the end of a political stalemate that left the state without complete budgets for an unprecedented two straight fiscal years.

Hampton said nothing was imminent that would push the rating down to the initial junk level of Ba1, although the risk remains that political pressures could lead to bad policies.

Illinois also has a stable outlook from S&P Global Ratings, which rates it just above junk at BBB-minus. Fitch Ratings continues to have a negative outlook on Illinois’ BBB rating, which is two notches above junk.

Among the 50 states, Illinois has the lowest ratings and pays the biggest yield penalty to sell debt in the municipal bond market due to its $129 billion unfunded pension liability and a chronic structural budget deficit.

Moody’s said the state could still fall into junk territory if its unpaid bill backlog balloons or if its pension contributions are reduced to provide fiscal relief. A rating upgrade could be possible if Illinois adopts a comprehensive plan to address its pension liability, deflates the bill backlog without borrowing, and takes measures to achieve a sustainable balanced budget.

Reporting By Karen Pierog; Editing by Daniel Bases and Richard Chang

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