Illinois’ proposed budget puts the state on track for a possible upgrade, Fitch Ratings suggested in a report published Wednesday.

Fitch rates Illinois BBB-minus, one notch below S&P Global Ratings and Moody’s Investors Service, which both upgraded the state last year.

What Fitch ultimately does hinges on the final budget adopted by lawmakers.

The state’s $8 billion in federal American Rescue Plan Act relief and swelling tax collections that provide about $3 billion in unanticipated revenues have bolstered the state’s fiscal health.

But it’s Gov. J.B. Pritzker’s proposed use of surplus cash to pay down bills, build up a depleted reserve, and make a supplement pension contribution that sets the stage for an upgrade, the rating agency says.

“Illinois’ once-towering backlog of unpaid bills has been steadily reduced, with more improvements possible if the governor’s proposals are implemented,” said Eric Kim, Fitch’s head of state government ratings and lead analyst for Illinois. “Continuing more normal fiscal decision-making process, including on-time budgets that address fiscal challenges primarily with sustainable measures, could support positive rating action.”

And Fitch suggested the hike might not be limited to a one-notch move.

“Continued operating performance improvement and structural balance could support a return to the state’s pre-pandemic rating or higher,” the report said.

The state headed into the pandemic with a BBB rating from Fitch, two notches above junk. Fitch cut the rating to its current BBB-minus and assigned a negative outlook in April 2020 citing the pandemic’s strains.

As fiscal pressure eased in mid-2021, Fitch lifted its outlook to positive from negative but held the rating as its peer agencies issued upgrades. Moody’s Investors Service rates Illinois Baa2 with a stable outlook and S&P Global Ratings rates it BBB with a positive outlook.

Fitch, Moody’s and S&P’s lead Illinois analysts all offered an initially positive view of the budget in interviews earlier this month with The Bond Buyer but Fitch’s commentary published Wednesday is the first formal rating agency statement since then.

“Fitch recognizes the significant progress made by the state the past three years and I appreciate the thorough review contained in the report,” Illinois budget director Alexis Sturm said in a statement. “Illinois has made major strides towards returning to pre-budget impasse strength, and, in many ways, is returning to a fiscal position not seen in over a decade.”

Surpluses allow the governor to target “some of the state’s steepest credit challenges,” Fitch wrote calling the budget’s expectation of slowing growth in fiscal 2023 “prudent.”

The state is avoiding a “fiscal cliff” that adds to structural challenges by using $535 million in ARPA funds for one-time measures and surplus dollars for various one-time measures.

The state used $2.8 billion in the current budget for one-time allocations on infrastructure and other pandemic-related measures along with $2 billion that flowed into a special fund for mixed uses. About $1.5 billion will offset budgetary expenses as the state tapped higher tax collections to pay down debt.

About $3.5 billion remains available and the administration has suggested that a big portion of it might go to help pay down a $4.5 billion federal loan for the state’s unemployment trust fund.

“Illinois’ governor recommends largely nonrecurring uses for the significant revenue surplus, including credit-positive efforts to rebuild fiscal resilience and reduce long-term liabilities,” Fitch said. “Tax and fee relief is structured as one-time, thereby mitigating near-term credit risk.”

The budget provides $1 billion in one-time tax relief which Fitch warned against making permanent as that would add “long-term risk.”

The state last month repaid early its three-year $2 billion Municipal Liquidity Facility loan taken out in late 2020 and the remaining $600 million of the $2.3 billion of inter-fund borrowing used to manage through a two-year budget impasse that ended in 2017 is set to be repaid this year. Fitch views paying off both debts “positively.”

Additionally, Fitch views positively proposals to pay down $898 million of outstanding health insurance bills in the current and next fiscal years, making $500 million in supplemental pension contributions, and paying off a $230 million liability in the state’s college savings program.

The burdensome $139.9 billion unfunded tab for a pension system just 42.4% funded and lack of actuarial-based payment schedule still limits the state’s ratings. The supplemental contribution would trim about $1.8 billion in liabilities. The scheduled payment falls about $4 billion short of an actuarially based one.

“Illinois’ pension liabilities and related contribution demands will grow over time if the state continues to underfund the systems,” Kim said.

Pritzker, a Democrat, unveiled the budget earlier this month While Republicans have attacked the budget plan, Pritzker enjoys Democratic majorities in the legislature.