(Bloomberg) -- Illinois is closing the gap with its peers in the municipal-bond market as investors herald the passing of an on-time budget and a broad improvement in the state’s fiscal standing.

The extra yield that investors demand on Illinois debt shrank on Wednesday toward the lowest levels of 2024 as lawmakers approved a $53 billion budget for the year starting July 1, a sign pressure is easing on the US state with the weakest credit rating.

The budget was the tightest in several years and led to back and forth in the two Democrat-controlled chambers about how to balance revenue with rising costs. But there were none of the kind of fireworks Illinois has exhibited in past years, such as in the budget impasses seen from 2015 to 2017, said Ty Schoback, a senior municipal research analyst for Columbia Threadneedle Investments.

“The state’s come a long way,” said Schoback, whose firm owns Illinois debt. “All in all, the budget is pretty unexciting, which is a good thing.”

Passing balanced budgets on time is among steps that have eased volatility and headline-risk Illinois investors had seen in the past, when the state was teetering on the brink of a junk rating, he said. 

Illinois’ spread above AAA 10-year municipal bonds has shrunk to under 62 basis points, down from 95 in January and more than 440 basis points in 2020, data compiled by Bloomberg show. Yet it still pays the highest penalty among peers to borrow in the muni market. Its spread is more than double that of New Jersey, which has the second-lowest rating among US states.

A standoff between former Republican Governor Bruce Rauner and the Democrat-run legislature led to two years without a budget from 2015 to 2017 and pushed Illinois’ unpaid bills to above $16 billion in 2017. The state had almost no rainy-day fund and years of underfunding caused it to owe more than $140 billion to its five pension funds.

Read more: Investors Just Want Illinois Governor Who Will Avoid Junk Rating

Over the last several years, however, the state has passed balanced budgets on time, paid down bills, built up its rainy-day fund and boosted pension contributions. That’s helped it secure nine credit upgrades, lifting its ratings to the A level.

“We are just beginning to analyze the budget that’s passed through the legislature,” which looks similar to Governor J.B. Pritzker’s February proposal, said Eric Kim, an analyst for Fitch Ratings, which gives an A- grade to the state’s debt, with a stable outlook.

The Civic Federation, a government finance watchdog group, commended the state for not resorting “to fiscally irresponsible practices of the past” but expressed concern about future spending without revenue growth and underscored the need for more long-term planning. The fiscal 2025 budget increases revenue with measures including a higher cap on corporate net operating loss deduction and a graduated tax structure on sports betting.

Read more: Illinois Corporate, Betting Company Tax Changes Go to Governor

(Updates with Civic Federation comment in last paragraph.)

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