CHICAGO – Illinois' rising backlog of unpaid bills could pressure the state's already battered credit rating, Moody's Investors Service warns in a new commentary.
Illinois' bill backlog grew to $6.6 billion at the close of December from $6.2 billion a month earlier as a seven-month-old impasse over the fiscal 2016 budget drags on.
"As the state moves closer to fiscal year-end with no sustainable solution to its revenue shortfall, incorporation of the year's deficit into the backlog total grows increasingly likely," Moody's says.
Concerns that the state's budget gridlock would push the backlog toward $10 billion factored into the rating agency's October downgrade of the state's general obligation bond rating to Baa1 from A3. Illinois was already the lowest rated state at the higher level. Moody's assigns a negative outlook.
"Prospects that the backlog will rise to substantially higher levels, or that growth will extend beyond the current fiscal year, are likely to put further pressure on the state's credit standing," Moody's says in Tuesday's report. Rating agencies track the state's bill backlog closely because its size illustrates the state's liquidity position.
The state currently is on track to close out the current fiscal year with a $5 billion deficit because spending remains on pace with fiscal 2015 levels even without a budget in place, and income tax collections are down about $3.6 billion due the partial expiration last January of a temporary income tax hike.
The state is on course to spend $36.8 billion. While GO debt payments and some other spending is ongoing due to continuing appropriations, special appropriation bills passed by lawmakers, and through court orders, the state owes $5.3 billion to its public universities and for employee health insurance and the tab grows when social services spending is counted.
"This growing payment backlog – equal to about 19% of the state's annual general funds expenditures – is a clear indicator of weak liquidity and governance," Moody's says.
Gov. Bruce Rauner, who delivers his second State of the State address Wednesday, intends to trim $700 million off the gap through a combination of fund reallocations and other administrative steps, but it won't solve the state's fiscal budget dilemma. Democratic lawmakers continue to resist the GOP governor's calls for passage of his governance and policy agenda as part of a budget solution and Rauner won't support a tax hike unless his policy proposals pass.
Moody' highlights that GO bondholder positions are not hurt by the growing backlog because monthly transfers in advance of semi-annual debt service payments minimize risk of tardy debt service payments. The state also enjoys ample liquidity of at least $4.7 billion in non-general fund accounts which can be tapped for GO debt service fund deposits.
That's the message -- at least for the time being. If the backlog "substantially exceeds levels the state now projects for fiscal year-end, the payment backlog would indicate worsening liquidity that, at some point, will affect the ability to make monthly debt service fund deposits as required by law," Moody's adds.
The state's long-term prospects also look dim based on its three-year budget projections released annually in January. The projections show the bill backlog on course to hit $9 billion at the close of fiscal 2016 on June 30. That's more than double the fiscal 2015 level. Without structural spending and revenue changes, the backlog grows to $25 billion, or 64% of expenditures, by the end of fiscal 2019. State statutes allow for the deferral of some bills to the next fiscal year.
