CHICAGO - Illinois' credit direction hangs in the balance as state lawmakers weigh decisions on a fiscal 2015 budget, Standard & Poor's said in a special commentary.
The key question is whether to accept Gov. Pat Quinn's recommendation to make permanent an expiring temporary income tax hike.
The commentary on the state's budget, published Wednesday, calls the decisions to be made in the remaining days of the spring session "pivotal" to addressing the state's structural budget imbalance. The session runs through May.
The report comes as Illinois prepares to take competitive bids Thursday on $250 million of general obligation bonds in its first sale since Quinn unveiled his spending plan for the next fiscal year and his proposal to make permanent the 2011 income tax hike that is set to partially expire Jan. 1.
"From a credit standpoint, the state of Illinois is approaching another critical juncture, as state policymakers face chronically high payables with pending statutory reductions in personal and corporate income tax rates," says the report authored by analyst Robin Prunty.
The state expects to carry about $5 billion of unpaid bills into the next fiscal year, highlighting the size of its structural imbalance. That figure is down from a high of $9 billion several years ago, but could grow again by billions due to the impending loss of $1.8 billion in revenue in fiscal 2015 and $4 billion in fiscal 2016 should the lost income tax revenue not be replaced, or spending cut to compensate.
Those challenges are heightened by other strains including the impact of health care reform, federal fiscal consolidation, a slow economic recovery, and pent-up spending demand for programs affected by recent cuts.
Standard & Poor's "believes the next 50 days or so will be pivotal to the state's future structural budget alignment," Prunty wrote. "We believe Illinois' ability to affect change to revenues and spending programs is well-established, so its credit direction will largely hinge on the willingness of policy makers to decisively address chronic budget issues."
The rating agency assigns a "developing" outlook to the state's A-minus GO rating. The outlook was shifted from negative after lawmakers passed a pension overhaul in December to stabilize its employee retirement system. It reflects analysts' belief that progress could be made on the state's fiscal challenges.
Illinois' more than $100 billion of unfunded pension obligations had led the list of problems that drove its credit deterioration over the last two years to become the lowest rated state.
Rating analysts have praised the pension legislation but pending litigation challenging the benefit cuts and concern over the tax rate drop have staved off any positive credit rating movement.
"We believe the final outcome of legislative deliberation on the budget and judicial deliberation on the pension reform will cement the state's credit direction and could have a profound effect on its budgetary performance and liquidity," Standard & Poor's said.
The rating agency left open the timing of any possible negative credit action should the state fail to shore up the budget through either increased revenue, spending cuts, or a combination, saying action could occur over a two-year period.
Proceeds of the sale Thursday will fund projects in an ongoing $31 billion capital program. Ahead of the sale, all three rating agencies affirmed their A-minus level ratings on the state's $28 billion of GO debt.
In the reports, they issued their first comments on Quinn's proposed budget which was submitted in two forms, one as a "recommended" that includes funds at the higher income tax rate and a "not recommended." Analysts don't take a position on how the state should deal with the tax cut but said the governor's recommended budget would improve the state's position.
Unless changed, the personal income tax rate falls to 3.75% from 5% and the corporate rate to 5.25% from 7%.
The not-recommended budget includes general fund revenues of $34.9 billion, 4.9% below current levels with $2 billion in cuts. "We believe that expenditure reductions of the magnitude in this budget could be difficult to achieve and might lead to year-end budget deficits and higher payables," Standard & Poor's said.
The recommended budget's general fund totals $37.9 billion, 8.6 % above the not recommended plan and 3.3% over current levels. The budget relies on an interfund transfer of $650 million, considered a credit negative because it's a one-time revenue. The budget plan is projected to end with a surplus of $480 million which would go to reduce overdue bills.
Moody's said its negative outlook reflects "our expectation that the state's financial position could deteriorate further if the state's 2011 tax rate increases are allowed to expire without offsetting steps next year."
"The governor's recommended budget for the coming fiscal year would make these tax increases permanent and provide a basis for the state to achieve fiscal balance," Fitch said.
State finance officials sought to highlight positive comments in the reports. "It's clear the rating agencies agree the Governor's proposed budget would bring long-term fiscal stability to Illinois," said acting budget director Jerry Stermer.
