Overview

S&P Global Ratings maintains ratings on 238 municipalities and 21 counties in Illinois. Currently, 58% of Illinois municipalities and counties are highly rated ('AA-' or above), and 8.5% have debt rated in the 'BBB' category or lower. During the period of Jan. 1, 2018 to July 29, 2019, only about 8% experienced changes in their general obligation (GO) rating or issuer credit rating (ICR). More entities' GO ratings/ICRs were downgraded than upgraded during the year.

We expect generally stable conditions in the Illinois municipal portfolio in the coming year, despite significant challenges, particularly with regard to many municipalities continuing to grapple with large unfunded pension liabilities. With regard to its economy, the state has continued to see a large divergence between the generally higher-growth economy in the Chicago metropolitan area and tax bases downstate, which are marked by weaker growth and less economic diversity. Overall, the state's economy, similar to the Great Lakes region as a whole, is expected to see slower economic growth than most other parts of the nation. The state passed its 2019-2020 budget on time, and while it still has a lingering structural imbalance, the budget includes a significant increase in state gas tax, which is expected to be used for capital projects in the coming years and will benefit local communities. The state continues to reduce the local government distributive fund by 5% for municipal governments, which is the same reduction that occurred last year. State legislators also authorized a referendum for a statewide graduated income tax, which will go to voters in November 2020.

Illinois' pension funding challenges remain acute, particularly with regard to single-employer public safety pension plans. Estimates indicate that the over 650 public safety pension plans statewide are 55% funded in aggregate. We anticipate that Illinois municipalities' attempts to remedy these funding deficiencies will absorb a sizeable portion of their budgets next year.

Rating Changes Due To GO Credit Factors

Upgrades are typically driven by material improvements in budgetary flexibility; the health of its single employer pension plans or policies and budget actions that address the long-term viability of those plans also factors into recent rating actions. For instance, we raised the ratings on Broadview and Melrose Park for these reasons; additionally, in Robinson's case, it's improved economic measures factored into the raised rating.

Several entities sustained downgrades during fiscal 2018. These include Rock Island County, Dwight, East Alton, Alton, East Peoria, and North Chicago, to name a few. Structurally imbalanced budgets and weak reserve levels, exacerbated by the growing pension contributions and weakly funded pension plans, are main contributors to the downgrades sustained by credits in the portfolio. Cook County's outlook was revised to negative due to pressures its low pension funding levels put on the county's operations, despite its efforts to improve the funding of its pension liabilities. For Markham, the acute combination of these factors and a weak economic profile contributed to its downgrade and its 'B' category rating.

Rating Changes Owing to Criteria

In accordance with our new "Issue Credit Ratings Linked to U.S. Public Finance Obligors' Creditworthiness" criteria, published on Jan. 22, 2018, a number of issuers experienced rating changes to various types of bonds that fall under this criteria. Several issuers, such as Bensenville, Aurora, Edwardsville, and Stephenson County, to name a few, experienced rating changes to their GO debt certificates, and this debt is now rated on par with our view of their general creditworthiness. The fungibility of resources and the ability to manage those resources drive our view of the obligor's ability and willingness to pay.

Under our GO debt and linked criteria, the ICR/GO and appropriation ratings could be negatively affected by a large speculative project, particularly if we view the entity's relationship to the project funded by the bonds as somewhat auxiliary to its basic functions and purpose. Additional notches may also be applied if the intended revenue source to pay debt service is insufficient to meet debt service requirements. Such is the case with Lombard, where its 'B' category ICR reflects its very weak management and lack of willingness to support appropriation debt despite other credit factors ranging from adequate to very strong.

Municipalities with home rule powers do not need voter approval to issue GO unlimited tax debt. Non-home rule municipalities, however, need voter authorization to issue unlimited tax GO bonds, with a simple majority required. Often, non-home rule entities will turn to non-referendum types of debt to meet their capital needs. The most common debt types are GO alternate bonds, limited tax bonds, and debt certificates, which are unvoted general fund obligations.

GO alternate bonds are secured both by a pledged revenue source and an unlimited property tax levy. Generally, the rating assigned to the bond issue reflects the unlimited-tax GO rating of the entity, since ultimately, it tends to be the stronger of the two pledges. Entities subject to the property tax extension limitation law can issue limited tax GO bonds which are secured by a debt-service-extension base, and this type of debt is payable from ad valorem taxes levied against all taxable property in the entity's taxing boundaries without limit as to rate but limited as to amount. We typically rate these bonds on par with the unlimited GO pledge, or issuer credit rating (ICR), due to the obligation to use all legally available funds to pay debt service. As per our criteria, we typically rate non-ad valorem debt and general fund-backed bonds on par with our view of the obligor's general creditworthiness, as reflected in the rating on the unlimited-tax GO bonds or ICR.

For more information, please see the following criteria articles:

• "Various U.S. Local Government Obligors' Non-Ad Valorem Debt Upgraded One Notch Following Criteria Application" published Feb, 23, 2018, on RatingsDirect).
• "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness" published Jan. 22, 2018, on RatingsDirect.

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