The state of Illinois’ budget passed this month will have a mixed effect on local governments, including those of Chicago and its Board of Education as well as Cook County, Fitch Ratings said in a report released on Friday.

Fitch said it doesn’t expect the budget to directly result in any local government rating changes, though school districts remain vulnerable to a possible impasse over funding. Fitch gives the city of Chicago an issuer default rating (IDR) of BBB-minus with stable outlook, the Chicago Board of Education an IDR of B-plus with negative outlook, and Cook County an A-plus rating with stable outlook.

Fitch also said the state budget included a change that could be significant to capital financing in the state.

An amendment to the Illinois Municipal Code creates a structure that enables Chicago or other home rule municipalities to create entities to issue debt without being constrained by the local government's IDR. If properly applied by a home rule municipality, the new entity could have ratings higher than the IDR assigned to the local government, Fitch said.

Illinois State Capitol
Illinois State Capitol Adobe Stock

For Chicago, a big benefit in the budget was the inclusion of pension changes for two of the city’s funds, Fitch said. The legislation, which lawmakers had previously passed but was vetoed by the governor, removes uncertainty associated with the implementation of the reform plans for the city’s Municipal and Laborers' pension funds, according to Fitch.

The budget pact commits the city to a higher contribution schedule, with a gradual ramp up to achieve 90% funding by 2060, according to actuarial projections. It also creates a tier for new employees, which lets them have a choice of a lower retirement age in exchange for higher employee contributions.

The budget also imposes a 2% fee on local sales taxes to generate additional revenue for the state.

“This should not result in a change to the Chicago sales tax bond ratings, which are capped by the city's IDR,” Fitch said. “The underlying sales tax revenue stream supporting those bonds would support a much higher rating if bondholders were not exposed to the operating risk of the city.”

The budget also includes a 10% reduction in local government distribution funds, which are state income taxes distributed to local governments.

Neither of these changes will have a significant budget impact on the city, Fitch said.

“The biggest impact to the Chicago Board of Education is the presumption that a fully funded state budget will result in more prompt distribution of state aid to districts,” Fitch said, “although it is likely that the flow of categorical block grants will only improve to the extent the state's own payment backlog improves.”

The public schools are currently owed $304.5 million in block grants, which under existing state law are required to be paid by Dec. 31. If they are not paid by then, the appropriation expires unless the governor and comptroller extend it.

The budget also includes increases in preK-12 education funding, though distribution of that money is contingent upon the lawmakers passing an “evidence-based education funding reform.”

While the Democrat-controlled legislature has passed its version of the legislation, it has not yet been sent to the governor. If passed into law, it would provide for $221 million of pension aid and $71 million of new state aid to Chicago schools for a total increase of $292 million.

The Republican plan would result in a state aid cut of $73 million and also separate out the $221 million of pension aid from the base formula and grant it in separate legislation, for a net increase of $148 million.

Chicago is the only school district in Illinois responsible for paying its own pension costs; others participate in the state-run plan and the state bears most of the costs. Separating out the $221 million pension aid would be less advantageous for Chicago schools, as it would make the aid vulnerable to budget appropriation each year, according to Fitch.

However, either version represents a large increase in funding for the CPS, whose financial position is characterized by chronic structural imbalance, slim reserves and a weak liquidity position, Fitch said.

However, Fitch said it is concerned that “the requirement for agreement on an evidence-based education funding reform legislation before school monies can flow represents a vulnerability to all Illinois school districts. The state board of education has said that the legislation must be passed by Aug. 3 in order for state aid to flow to districts before the start of the school year.”

Fitch said it will monitor the potential impact this may have on Illinois school district ratings and if no legislation is passed by that date, will take action on a case by case basis.

A 10% cut in funding for higher education will hit local governments, although the budget provides full funding for grants to low income students, which should help community college districts, according to Fitch.

Fitch said Cook County should benefit from a reduction in delayed Medicaid payments to its health system, which threatened to strain the county's liquidity.

“The county will also be affected by the 2% administrative fee on sales taxes, a 9% reduction in personal property replacement taxes, and the 10% reduction in LGDF payments which may be partially or fully offset by catch up payments on a cash flow basis,” Fitch said. “While these are all relatively small impacts on Cook County's overall budget, they come at a time when the county is still trying to solve for the loss of its sweetened beverage tax, which has been temporarily blocked by the courts.”

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