CHICAGO — Illinois' fiscal 2015 budget reverses course on recent strides, relying on fiscally harmful practices like borrowing to cover operations and shorting known expenses, a local government review group warns in its new review of the spending plan.
"Before this budget, we had several indications that Illinois was capable of addressing its enormous fiscal problems," Civic Federation of Chicago president Laurence Msall said, as the federation's Institute for Illinois' Fiscal Stability released the review Thursday. "The gimmicks of this year's short-sighted budget send the opposite message and move Illinois in the wrong direction."
Illinois lawmakers — with the November general election hanging over them — rejected Gov. Pat Quinn's proposal to make permanent a 2011 income tax hike that begins to expire midway through the fiscal year on Jan. 1.
They also refused to make the deep cuts needed to offset the nearly $2 billion loss in revenue due to the tax rollback, with the expectation that they would revisit the budget and tax plan after the election.
Standard & Poor's responded by revising the state's outlook to negative from developing. It had assigned a developing outlook in recognition of the state's passage of sweeping pension reforms in December. The state is the lowest rated one at the low-single-A level. Fitch Ratings, Moody's Investors Service, and Standard & Poor's all assign it a negative outlook.
Passage of a more structurally sound budget could have helped stabilize the state's credit as analysts also await the legal outcome of a challenge to the pension reform package. General funds revenues decline by $1.7 billion to $35.1 billion in fiscal from $36.8 billion in 2014.
The budget instead marks a return to the state's past practices that helped sink its credit, the federation warned.
After paring down the state's bill backlog down to about $4.6 billion at the end of fiscal 2015 from a high of nearly $10 billion in 2010, the new budget will drive the backlog back up by an estimated $400 million, according to the report.
The budget borrows $650 million from non-general fund accounts to fund operations that must be repaid in 18 months. The budget relies on $600 million in fiscal 2014 revenues to cover Medicaid expenses in the new fiscal year instead of paying down old bills. The budget also fails to fund nearly $500 million in anticipated expenses that will require a supplemental appropriation.
"General funds expenditures appear to decline in fiscal year 2015, but actually increase by $528 million due to this shifting of funds from year to year and between state accounts," the federation report said.
The federation said the budget's "gimmicks" will make balancing the fiscal 2016 budget even more difficult.
The budgetary struggles could escalate should the courts reject the state's arguments that it had little choice but to cut pension benefits because of its precarious fiscal condition and agree with unions that the changes violate the state constitution's protections against impairing or diminishing benefits.
Due to the challenge, the budget doesn't reflect any savings in contribution levels. The state is banking on a $1.2 billion reduction in its contributions in fiscal 2016. The state will pay $6 billion in contributions this year.
The state expected to hold increases for group health insurance down to 1%, based on negotiated savings with unions under the state's revised retiree healthcare rules, but contributions will rise at a faster clip. That's due to an Illinois Supreme Court ruling that found retiree healthcare benefits are protected.
The state anticipates a $289 million shortfall in its capital projects fund — the account that holds funds from various tax and fees approved in 2010 for the $31 billion capital program --with the general fund covering the gap. The shortfall is due primarily to delays in the implementation of video gaming at local establishments.
The state's debt service costs on its $31.3 billion of its general obligation and sales-tax backed debt in the current budget totals $3.9 billion. The state owes a total of $16.4 billion in interest on its debt through fiscal 2039 for a total outstanding debt service cost of $47.7 billion.
The state's fiscal 2015 capital budget totals $21 billion, including nearly $17 billion of reauthorized projects and $4.2 billion of new authorizations.
Janney Capital Markets in a recent monthly municipal bond market report noted Illinois' structural woes and the volatility of its spreads over the last five years. The spreads on its 10-year maturities stand at about 155 basis points over the Municipal Market Data benchmark, significantly higher than other struggling states like New Jersey, but down from a 2011 high of over 200 basis points.
Despite the state's credit deterioration, it retains breathing room of three to four ratings levels before triggering termination events on its swaps portfolio with a negative valuation from last year of $124 million, the federation noted.
In response to the federation's report, Quinn's deputy budget director Abdon Pallasch reiterated Quinn's position after the General Assembly that the General Assembly fell down on the job in sending him an "incomplete budget that does not pay down the bills but instead postpones the tough decisions."
"By contrast, all three ratings agencies had praised Gov. Quinn's proposed budget, which extended the state's current tax rates and met the state's financial obligations. Legislative leaders have said they will have to return in the middle of the fiscal year to discuss new revenues for the budget," Pallasch said.