Overview

Illinois counties and municipalities (or local governments [LGs]) have demonstrated stable or improved credit characteristics during the past year despite the effects of the pandemic because of the receipt of substantial pandemic relief aid, strong revenue patterns, and generally conservative budgeting, that enabled many Illinois LGs to outperform expected forecasts. S&P Global Ratings expects credit quality for Illinois LGs will remain stable in the near term. Credit pressures remain, though, with macroeconomic trends, particularly higher inflation and the risk of recession, presenting new challenges for Illinois LGs in the coming year. Continued increases in annual pension contributions to address large unfunded liabilities could create budget pressure leading to weaker credit quality for some.

S&P Global Ratings maintains ratings on 253 LGs in Illinois--22 counties and 231 municipalities. The credit trajectory was mostly positive over the past year with one county and four municipalities upgraded since November 2021, following a sustained period of improved reserves. Over the same period, we revised the outlook on one county and eleven municipalities to stable from negative and downgraded two municipalities (Granite City and Palos Hills), both due to structural imbalances due to poorly funded pension plans. Currently, 95% or 242 of our ratings on Illinois counties and municipalities have a stable outlook, while seven municipalities and one county carry negative outlooks, with two counties and one municipality having positive outlooks (see rating distribution table below).

What We're Watching In 2022 And Beyond

We anticipate continued overall stability for Illinois LGs in the next year given the availability of federal pandemic relief aid and mostly stable revenue trends, although higher expenditures associated with significant personnel cost increases could lead to budgetary stress. Property tax revenue, typically the largest revenue source for most Illinois LGs, improved or at least remained stable for most Illinois communities during the pandemic and we expect this revenue stream will continue to be resilient. In addition, state-shared revenue such as income taxes and personal property replacement taxes outperformed expectations in the past year.

S&P Global Ratings expects unfunded pension liabilities will remain relatively high for Illinois municipalities. These pressures arise primarily from poor historic funding practices and market volatility. The state's efforts a decade ago to reduce pension costs through the implementation of statutory minimum funding requirements and tiered pension benefits have had mixed results. While the implementation of pension benefit tiers limited the increase of plans' total liabilities, the statutory minimum funding requirements are based on weak funding assumptions which defer costs. We expect Illinois municipalities' pension liabilities will continue to increase substantially, potentially pressuring budgets and heightening credit risk. In addition, market volatility in 2022 is causing many pension funds to fall well short of anticipated investment rates of return. For more information regarding our views on the recent market volatility and their effects on pension funding, see "How Do U.S. Pension/OPEB Credit Analysis Guidelines Stand Up Amid High Inflation And Lower 2022 Market Returns?" published Aug. 23, 2022 on RatingsDirect.

We anticipate pension consolidation—the combination of single-employer police and firefighter pension plans, with the investments administered by the State of Illinois—will likely reduce administrative costs for issuers and enable smaller municipalities to invest in a greater diversity of investments. However, the absence of improved statutory minimum funding requirements paired with newer pension funding sources likely means that annual pension contributions for many municipalities will continue to fall short of minimum funding progress.

Spotlight On Environmental, Social, Governance Factors

While Illinois, similar to other states in the U.S., is experiencing more frequent environmental events, including periodic flooding and tornadoes, we do not expect these conditions will result in immediate risks to the credit quality for Illinois LGs. Despite specific adverse flooding occurrences in Illinois from the Mississippi, Illinois, and Des Plaines rivers and the ongoing erosion of the Lake Michigan shoreline from increased storm intensity, we view environmental physical risks as neutral in our credit rating analysis for most Illinois LGs. Furthermore, while fairly isolated, Illinois LGs are located in a region where stakeholders are beginning to address energy transition trends from exposure to coal mining or manufacturing of high-emission vehicles, which could lead to economic pressure. But we view this as a long-term risk that has limited influence in our credit rating analysis for now. Illinois is also home to large-scale clean energy manufacturing, with an electric vehicle plant in Normal and a new electric bus factory in Joliet scheduled to begin production later this year.

We consider social factors for Illinois LGs to be neutral, although certain areas of Illinois are experiencing ongoing population declines and some adverse demographic trends, and the state's population decreased slightly according to the 2020 census. These weaker demographic trends are more pronounced in rural areas and downstate, which have experienced decades of resident outmigration. In addition, in recent years many residents moved to warmer parts of the country and to states with a lower tax burden. While Chicago and its surrounding suburban area have been less affected by demographic shifts, those Illinois LGs experiencing declining population, a shrinking tax base, and weakened economic growth could find it difficult to sustain current levels of services and budgetary balance.

Governance risks for Illinois municipalities and counties are elevated. This largely reflects funding pressure associated with significant unfunded pension liabilities, which is especially common among municipalities that maintain single-employer police and firefighter pension plans. In addition, some Illinois municipalities demonstrate higher governance risk because of vulnerable management practices, weak internal controls, and management turnover. These risks have could result in weaker budgetary performance or inability to maintain a stable credit profile, and when material, we have sometimes lowered ratings or revised outlooks to negative.

Illinois Local Government Data

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