Fitch says Illinois was vulnerable before COVID crisis, federal bailout won’t negate lost economic activity

Analysts with Fitch Ratings said the federal stimulus plan will help state and local governments, but it won’t replace lost revenue from the economic downturn.

On March 16, Gov. J.B. Pritzker ordered all restaurants to close to dine-in service in an effort to slow the spread of COVID-19, a move that was expected to impact local and state tax revenues. Casinos shut down, video gaming machines across the state went dark and just days after getting sports betting got started in Illinois, sports leagues suspended their seasons. All of those things mean lost tax revenue for the state

Next, Pritzker issued a stay-at-home order that closed all nonessential businesses.

Similar actions have been taken across the country. In light of the expected economic downturn, Fitch Ratings hosted a webinar Thursday about how those things could affect state and local governments.

Arlene Bohner, head of U.S. Public Finance for Fitch Ratings, said COVID-19 started a downturn like no other.

“We’re looking at this total lockdown of activity as an economic shock the likes of which we have not seen before in our lifetimes,” she said. “And at the end of the day, the ultimate effect is going to depend upon the duration and the severity of the crisis.”

President Donald Trump has said he wants to get the country’s economy going by Easter. Pritzker said earlier this week that he was concerned he might have to extend his stay-home order beyond April 7.

Eric Kim, head of U.S. State Governments for Fitch, said Illinois was in a tough spot before the COVID-19 crisis because of existing risks, such as having the lowest investment-grade credit rating and the state’s high pension debt.

“Illinois, again, the lowest-rated state, a Triple-B with a stable outlook and that just inherently reflects more risk generally, not just to this particular crisis, but just overall,” Kim said. “So they are more vulnerable.”

The analysts said they are watching what state and local governments do to manage the crisis. They said those that have reserves and strong liquidity will likely weather the storm while states with heavy debt liabilities will struggle.

In an effort to help state and local governments, the U.S. House is expected to pass a $2.2 trillion COVID-19 aid package that will have $150 billion to split among state and local governments.

Kim said people need to understand that the federal funds will only likely cover increased spending to manage the pandemic.

“The aid that’s dedicated here, the $150 billion, does not cover revenue losses, so in that sense, it doesn’t address the kind of fundamental problems that state and local governments are likely to face,” Kim said.

Illinois’ share of the $150 billion could be $4.9 billion, according to the National Council of State Legislators, but The Tax Foundation said a portion of that, or about $600 million, could go directly to Chicago.

Michael Rinaldi, Head of U.S. Local Governments for Fitch, said the unfolding situation is far outside of a moderate recession scenario.

“Short term risk may take precedence over relatively stable longterm credit fundamentals, particularly for those issuers with weaker financial reserves and liquidity,” Rinaldi said.

Just how much credit ratings will be impacted depends on the data the analysts say they’re working with states to determine the true impacts of the expected downturn.

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