CHICAGO - The festering political paralysis gripping Illinois underscores the state's weak leadership, but pensions remain the real problem, Moody's Investors Service said in a report Monday.
"Illinois' expected impasse between the Democrat-led state General Assembly and the Republican governor over a budget for the fiscal year that began 1 July is symptomatic of the state's severe fiscal challenges," analyst Ted Hampton wrote in an Aug. 31 report titled "Late Budget Matters Less Than Solving Pension and Revenue Problems."
"Provided that the two sides reach a consensus soon, the nature of their eventual agreement will matter more than the long delay that has already occurred," Hampton wrote.
First-term Republican Gov. Bruce Rauner has been locked in a battle with the General Assembly's Democratic majority over a 2016 budget for months. Rauner vetoed all but the education bills in a $36.3 billion spending plan lawmakers passed in the spring, calling it unbalanced by $4 billion. Democrats counter that Rauner's own $32 billion budget was also out of whack because it relied on savings and spending cuts like pension reforms that couldn't pass a legal test.
But the state has seen budget delays before, and so far any financial consequences have been limited, said Moody's. The chief problem remains the state's "severe and growing" pressure to fund its retirement benefits.
The state's A-minus level ratings from all three major ratings agencies are the lowest of any state. Fitch Ratings and Moody's assign a negative outlook.
Retiree benefits will account for about 24% of the current fiscal year's general fund expenditures without any reductions, Moody's said.
"The state's ability to manage these pressures will be a primary determinant of future rating actions," Hampton wrote. "Given the state's ironclad protection of benefits for current workers and retirees, Illinois requires a long-term plan to ensure that it can at least comply with statutory funding requirements."
Illinois still has time and options left to address a current-year shortfall that's estimated at $5 billion, said Moody's.
Raising the income tax, for example, could pump more than $2 billion into its coffers. Illinois is one of only eight states that levies a flat income tax, and its 3.75% individual rate is lower than the average 4.4% rate among those states, according to the ratings agency. Raising the individual rate to 4.75% and the corporate rate to 6.75% from 5.25% would generate $2.4 billion of revenue to help offset the $5 billion deficit, Moody's said. The state "could probably" impose $1.7 billion of cuts, leaving $500 million to be addressed by one-time measures, Moody's said.
"Addressing this projected deficit becomes increasingly challenging as time remains in the fiscal year elapses," Hampton said. "Continued political gridlock and the inability to reach an agreement by late September, the end of the state's first fiscal quarter, will greatly increase the likelihood of the deficit moving from projected to actual."
