CHICAGO – Paying off some of its current $14.9 billion backlog of delinquent bills with general obligation bonds could aid Illinois’ strained liquidity, S&P said Tuesday in a special report.
The $36 billion fiscal 2018 budget package approved by the General Assembly’s Democratic majority in July with the help of some GOP members who broke with Gov. Bruce Rauner authorized the sale of up to $6 billion in 12-year GO bonds by Dec. 31 to pay down the backlog. The approved plan, however, only supports $3 billion of GOs by earmarking a $356 million end of the year surplus to cover the first year of debt service.
“We don't take a position on any of the state's specific debt or fiscal policy proposals. But given that its budget reserve remains depleted, we believe that foregoing the opportunity to replenish some of this implicit cash flow borrowing capacity would leave the state's liquidity profile subject to heightened vulnerability,” S&P wrote in the report authored by analysts Gabriel Petek and Carol Spain.
The administration has resisted calls from Democrats, including Comptroller Susana Mendoza, to tap the authority. The Democratic comptroller who manages bill payment has sought to amplify pressure on the Republican administration to act on borrowing authority. The current backlog carries an estimated interest cost of $800 million.
Rauner has pushed back recently saying he’s not ready to act and that alternatives are under consideration. He wants to work with the General Assembly to enact an appropriation to pay down the debt.
Rauner spokeswoman Laurel Patrick on Tuesday said: “As I’ve mentioned previously, our office is currently reviewing the fiscal year 2018 budget enacted by the General Assembly to determine best next steps. As part of that review, we are considering bond issuances for both capital projects and the bill backlog.”
“Illinois taxpayers are accruing debt on our unpaid bills at a rate of $2 million a day," Mendoza said in a statement Tuesday. "It is almost unreal to think that we are burning through tax dollars at such an incredible rate when our schools and other critical services are severely underfunded and hundreds of thousands of people and businesses are awaiting payment."
When the new fiscal year neared without a budget, Mendoza warned that the state was at risk of falling short of the cash needed to cover even priority core obligations such as payroll and pension contributions although she stressed debt service was not jeopardized. A federal court ruling ordering the state make hundreds of millions more in monthly Medicaid related payments added to the strains.
Passage of the budget also eased mounting pressures threatened to sink its ratings to junk territory. Last month, Fitch Ratings and S&P Global Ratings took their respective BBB and BBB-minus ratings off watch, with Fitch assigning a negative outlook and S&P a stable outlook.
Moody’s Investors Service concluded a downgrade review by leaving the state’s rating at Baa3 with a negative outlook.
S&P said the issue could be viewed as deficit financing and doesn’t represent a best practice but “it is encompassed” in the state’s rating and because the backlog represents a state debt “replacing the unpaid bills with bonds does not represent a net increase in its overall liabilities.”
Debt service does represent a “hard” annual cost as opposed to the “soft” costs of bill payment offer some flexibility in timing but the state would see savings by capturing what’s expected to be a much lower rate than the up to 12% one the state pays on the bills now.
“Therefore, the state may realize net fiscal savings which we believe Illinois can ill-afford to pass up given its weakened financial position, even if the additional debt service adds incrementally to its operating deficit,” S&P wrote. Unanticipated liquidity stress remains one of the “leading risks to Illinois' credit quality.”