S&P Global Ratings upgraded the state of Illinois' general obligation bond rating to BBB from BBB-.
The ratings agency cited "improved liquidity, demonstrated operational controls during the pandemic, and an improving economic condition" in a news release Thursday.
It is the second major credit rating agency upgrade in the past two weeks for Illinois, which has teetered on the edge of junk bond status for over four years.
Moody's Investor Service upgraded the state of Illinois' credit rating to Baa2 from Baa3 on June 29 citing the "material improvement" of the state's finances.
In June 2017, S&P Global Ratings had downgraded Illinois' rating to BBB-, one step above junk bond status. At the time, a history of S&P ratings dating as far back as 1956 showed BBB- to be the lowest state rating on record.
While the rating upgrade, along with a stable outlook, provides the state with its first upgrade in over two decades, S&P Global Ratings said one credit weakness is "where the statutory pension funding is designed to attain a 90% funded status in 2045, which is one of the least conservative funding methodologies in the nation among peers."
The release also noted "the (BBB) rating also reflects our opinion of governance risks that we view as being above the sector norms due to the constitutional limits the state faces to modify its rising pension costs, and that the state is not contributing to meet static funding, limiting current and future budgetary flexibility."
The Illinois fiscal year 2022 budget includes $9.4 billion in pension contributions to the state's five pension funds. In a March report, Moody's Investor Service said Illinois' adjusted net pension liability will total $317 billion for the current year.
S&P Global Ratings said it could lower the rating again if the agency believes the state's pension costs limit operational flexibility during the next economic downturn.
In a news release Wednesday, Gov. J.B. Pritzker hailed the state's credit upgrade, the first it has received from S&P Global Ratings since July 1997.
"A well-known proverb states, a journey of a thousand miles begins with a single step. Throughout my administration we've remained steadfast in our goal to return Illinois to fiscal stability. That has meant making responsible decisions step by step, day by day, working closely with our partners in state government," Mr. Pritzker said in the news release.