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Illinois' credit rating stays investment grade with Fitch

CHICAGO (Reuters) - Illinois on Monday once again escaped a credit downgrade as Fitch Ratings affirmed the state’s BBB low investment-grade rating, citing the enactment of a budget for the first time in two years.

The move followed S&P’s decision last Wednesday not to saddle Illinois with the first-ever junk rating for a U.S. state by keeping its rating at BBB-minus, which is one notch above junk. Moody’s Investors Service, which also rates Illinois a step above junk at Baa3, has the state under review for a potential downgrade.

Fitch attributed its rating affirmation to the legislature’s enactment earlier this month of a fiscal 2018 budget and permanent income tax rate increases over the governor’s vetoes. It said the two factors should “significantly reduce the near-term liquidity stress that had threatened the state’s investment-grade rating.”

An impasse between Republican Governor Bruce Rauner and Democrats who control the legislature left the nation’s fifth-largest state without a complete spending plan for an unprecedented two-straight fiscal years.

Fitch said the negative outlook it placed on the rating “reflects the uncertainties related to successful implementation of the budget, particularly given the contentious political environment in the state.”

“An inability to meet the assumptions incorporated in the

fiscal 2018 budget that results in failure to reduce budgetary liabilities and materially improve the state’s stressed liquidity environment would lead to a downgrade,” Fitch said in a statement.

The budget calls for reducing Illinois’ more than $14 billion unpaid bill backlog by selling up to $6 billion of bonds, raising $300 million from the sale of the main state office building in Chicago, and saving about $1.4 billion through pension changes.

Fitch said other risks for the state’s rating include political gridlock over school funding and “significantly” slower revenue growth.

Rauner said on Monday he plans to veto part of a bill that revamps the school funding system.

The BBB rating, which is two notches above junk, affects nearly $26 billion of Illinois general obligation bonds.

Reporting by Karen Pierog; Editing by Matthew Lewis