Spreads tightened on Illinois paper even as watchdogs warned of budget gaps
CHICAGO – Illinois budget watchdog groups are skeptical over whether the $38.5 billion fiscal 2019 state budget that passed Thursday is truly “balanced” as lawmakers contend.
“Passing a budget before the end of the session is a positive and the Civic Federation is encouraged by the bipartisan spirit” that produced the budget, “but we are concerned that some of the assumptions are overly aggressive,” Chicago Civic Federation president Laurence Msall said in an interview Thursday after an initial review of the budget.
The state “is facing enormous economic pressures and this budget will not be viewed as an effective long-term solution for dealing with the state’s ongoing financial crisis,” Msall added.
The budget was passed on schedule Thursday, on the last day of the regular session, a shift from three years of conflict that resulted in two years without a budget and a 2018 budget that required a veto override after the fiscal year had already started.
Watchdog groups suggested that lawmakers from both sides of the aisle should restrain their self-praise about the budget plan given that it failed to deal with the state's $129 billion underfunded pension quagmire and its $7 billion bill backlog.
“There remains an enormous amount that needs to be done” on those fronts, Msall said.
Lawmakers overwhelmingly approved the budget plan after debate full of compliments for each side’s willingness to compromise.
“It’s built on some revenue assumptions that are probably unrealistic and some savings assumptions that are probably unrealistic so while it will appear balanced as in there’s an equal amount of revenue to expenditures, it’s not in balance,” Ralph Matire, director of the Center for Tax and Budget Accountability, said in an interview on WTTW’s Chicago Tonight program.
“There’s no sign of an attempt to deal with the true long-term problems confronting the state in primarily the pension debt obligations and the growth in that pension debt over time,” he said.
Matire and Msall both said that despite the budget’s flaws, it’s still better to have a budget than not.
With a narrow $15 million balance projected at the end of fiscal 2019, according to a statement from House Speaker Michael Madigan, D-Chicago, the state has little room for error.
The budget relies on $240 million from the long stalled sale of the state’s downtown Chicago headquarters, and $445 million in savings from three pension reform measures, including two buyout offers. The pension savings, if they materialize, would bring the state’s payments next year down to $7.3 billion.
Lawmakers said the savings were projected by the funds’ actuaries, but the Civic Federation wants to see an actuarial review. The buyouts are also voluntary so participation is not guaranteed.
“There’s a lack of transparency on the pension buyout and whether the state can realize the $445 million,” Msall said.
The budget documents are also short on details on $1 billion of borrowing authorized to pay for the buyouts and how that financing would be repaid, Msall said.
The budget also doesn’t account for what the state has estimated is a $300 million tab to cover step raises based on employees’ experience, which the state had withheld during contract negotiations. The courts have ordered the state to make good on the back pay and lawmakers during the budget debate acknowledged the cost would eventually need to be incorporated in the budget.
The budget leaves the unpaid bill backlog to linger. It hit a high of $14.7 billion last year as bills mounted during the impasse and has since been whittled down to about $7 billion with $6 billion in bond borrowing, the leveraging of federal funds, and inter-fund borrowing. The state has paid more than $1 billion in interest for bills that went unpaid during the impasse.
Lawmakers approved legislation Thursday that allows the state treasurer to use up to $2 billion of available state investment dollars to pay down the backlog at a few percentage points of interest compared to the 9% to 12% currently paid. The budget implementation bill incorporates savings from at least $1 billion in treasurer funds going to pay down bills, according to lawmakers.
“It may effectively save the state money but it is not the best practice,” Msall said. “It’s a workaround for a state that continues to spend more than it takes in. It would be better if the state had an effective plan to pay off the bills because it will still continue to pay some interest.”
While analysts digest the budget’s details, the market has already weighed in. The state’s spreads to the Municipal Market Data’s benchmark had narrowed to 185 basis points on Wednesday from 202 bp on May 1.
IHS Markit said late Thursday trading was heavy with spreads of 169 to 176 bp seen in maturities up to 11 years. Spreads were at 194 on May 23, said IHS’ Edward Lee.
Moody’s Investors Service and S&P Global Ratings give the state’s general obligation bonds their lowest investment grade ratings, with Moody’s assigning a negative outlook and S&P a stable outlook. Fitch Ratings is one notch higher at BBB and assigns a negative outlook. The rating agencies have not yet commented on the budget package but Moody’s issued a special report Thursday warning that action is needed soon to tackle Illinois' rising pension, retiree healthcare, and debt costs.