Illinois’ credit remains one notch above junk bond status, but better-than-expected performance during the pandemic and billions of dollars in federal aid have led one Wall Street ratings agency to improve its outlook for the state’s finances to “stable” from “negative.”

The change in outlook means Moody’s Investors Service believes Illinois has the wherewithal to avoid a downgrade to junk status during the next year or two.

“State and local government funds expected under the latest federal aid package may help the state repay deficit financing loans, support its financially pressured local governments and spur employment, income and tax revenue growth,” Moody’s said in an analysis.

Earlier this month, S&P Global Ratings also revised its outlook for Illinois to “stable” from “negative.”

But Fitch Ratings, in an analysis released just before the new federal relief package received final approval in Congress, affirmed its negative outlook for Illinois, citing “the state’s lack of meaningful reserves and its already extensive use of other fiscal-management tools, such as deficit financing.”

Fitch also noted that “short-term, nonrecurring measures taken during the pandemic have added to Illinois’ structural budget challenges.”

Like Moody’s, S&P and Fitch also rate Illinois’ credit one notch above junk.

Illinois is in line for $7.5 billion in direct aid from the relief package President Joe Biden signed earlier this month, with another $6 billion headed to local governments, roughly a third of which will go to Chicago.

The state, local governments and other public agencies also are set to receive billions of dollars in additional federal funding to assist with reopening schools, continue coronavirus vaccination and testing efforts, and pay for mass transit operations.

But Moody’s warns that even as the financial risks of the pandemic begin to recede, Illinois continues to face long-term financial challenges because of its massive unfunded pension liabilities. The five statewide pension plans have a combined debt of $141 billion, according to the legislature’s Commission on Government Forecasting and Accountability.

The new federal aid comes with few strings attached, but one major restriction is that it can’t be used to fund pensions.

The state borrowed money to balance its budget during the pandemic, including drawing $3.2 billion from a special Federal Reserve program. Illinois was the only state to tap that lifeline.

Gov. J.B. Pritzker and Comptroller Susana Mendoza have been pushing for the state to use the new federal relief to pay down debts, while lawmakers in both parties have called for the legislature to have a say in how the money is spent.

“Illinois still has a long way to go, but these two changes in outlook signal to investors that Illinois is heading in a better direction,” Mendoza said in a statement. “The ratings agencies make clear that Illinois using its funds from the American Rescue Plan to pay down debt is the most responsible path forward for the state’s finances and the best way for the state to achieve an upgrade in its ratings.”

The General Assembly has until May 31 to put together a spending plan for the budget year that begins July 1.

Pritzker last month proposed a $41.6 billion budget that holds spending flat in many areas but relies on more than $900 million in revenue from closing what he calls “corporate loopholes.” The governor’s budget proposal did not account for any of the new federal aid.