Illinois CAFR underscores state's ballooning red ink

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CHICAGO – Already awash in red ink, Illinois’ fiscal deterioration ramped up in fiscal 2017 as two years without a budget took its toll on the state's books.

The state’s dim short-and-long term fiscal condition was illustrated in the fiscal 2017 comprehensive annual financial report published Thursday by state Comptroller Susana Mendoza’s office, and a report on the state’s net position from auditor general Frank Mautino, who provides the opinion on the CAFR.

The state’s worsening fiscal health ensured it remained in the worst position among the 43 states with available information about a key accounting measurement.

The state’s general fund deficit, which presents a near-term picture of the state’s health, worsened by $5 billion in fiscal 2017, growing to a negative $14.6 billion from negative $9.6 billion. In the previous year’s report, it grew by $2.7 billion to $9.6 billion.

The last two years marked a sharp downtown. The deficit had grown only slightly from $6.7 billion in fiscal 2014 to $6.9 billion in fiscal 2015. In fiscal 2013 and 2014 some red ink was erased after hitting a previous high of negative $9.1 billion in fiscal 2012. The 2013 and 2014 improvement was due to fresh revenue flowing to the state from a 2011 temporary income tax hike.

In a measurement that provides a bigger, longer-term picture of its fiscal condition, the state’s net position of governmental activities eroded by $10.1 billion to reach a negative $141.7 billion.

The pace of erosion worsened from the previous year, when the state added $6.3 billion to its negative position to bring it to $131.6 billion in fiscal 2016. The figure was a negative $125.3 billion in fiscal 2015 and negative $121. 2 billion in fiscal 2014. In fiscal 2013 it was only a negative $47.9 billion.

The figure provides a more sweeping view of state assets and obligations because it counts liabilities such as bonded debt and pension obligations against assets such as cash, investments, and other state holdings.

"Over time, increases and decreases in net position measure whether the State's financial position is improving or deteriorating,” the auditor’s opinion says.

The state runs away with the title for the highest negative net position figure among those reviewed by the auditor, with Massachusetts next at a negative $63.4 billion, then Connecticut at negative $45.4 billion, Kentucky at negative $16.5 billion, Maryland at negative $10.6 billion, and Hawaii at negative $3.4 billion. Delaware and Rhode Island also have small deficit positions.

The remaining states are all in positive territory with Texas at $101.9 billion. The analysis did not include seven states because their financial results were not available by March 15, the auditor’s report said.

Gov. Bruce Rauner's office did not respond to a request for comment.

The state’s balance sheet is weighed down most significantly by its $128.9 billion of unfunded pension liability in a system just 39.9% funded. That’s not expected to get any better in the current fiscal year although the deficit figure should improve because of the infusion of new tax revenue.

The state’s general funds’ budgetary fund balance ended fiscal year 2017 with a deficit for the 16th consecutive year with the balance at a negative $7.98 billion compared to a $3.54 billion deficit recorded at the close of the previous fiscal year, according to the CAFR.

The state’s bill backlog hit a high of nearly $16.7 billion last November but is now at about $8.2 billion. The number is reflected in both the deficit and net position figures. The backlog was brought down by $6 billion of bond borrowing, so it remains a liability and doesn't change the calculation of net position of governmental activities.

“The state of Illinois did not have sufficient controls over its finances. This condition increases the risk that liabilities will not be properly recorded. Further, this condition increases risk and diminishes the oversight and authority of the budgeting and appropriation process,” the auditor’s report warned.

The state closed out fiscal 2017 on June 30 with $10.9 billion in bills that had been approved for payment by the state “but remained unpaid at year end due to the state’s cash flow difficulties,” the auditor wrote. About $7.4 billion was owed to external parties or vendors.

Due to the state’s tardiness in paying outside vendors it paid approximately $226 million in interest payments during fiscal year 2017 and an additional $579.8 million during fiscal year 2018 as of March 15, 2018, the auditor’s report said.

The comptroller’s office has put interest cost at $1 billion over the full course of the budget impasse.

“We recommended the governor work with the General Assembly to improve the state’s control over its finances in a manner that eliminates significant payment delays and unnecessary interest payments to state vendors,” the report says.

That’s not so easy to accomplish given the deep acrimony between Rauner, a Republican, and the General Assembly’s Democratic majorities, which drove the two-year budget impasse. It ended in July only after some Republicans broke with Rauner to support a new budget and tax hikes.

The upcoming election further complicates efforts to stabilize state finances. Rauner and Democrat J.B. Pritzker won their respective parties' primaries Tuesday and will face off in a November general election. Neither has offered a viable long-term plan on pensions and budget measures that could pass the General Assembly.

Two of Illinois’ general obligation ratings are one notch away from a historic cut to a speculative grade. The state closed out fiscal 2017 with $27.3 billion of general obligation and special obligation debt and the state paid $2.2 billion in principal and $1.5 billion in interest on those debts, according to the CAFR.

“The Comprehensive Annual Financial Report is the official financial statements for the state of Illinois, and the numbers don’t lie,” said comptroller's spokeswoman Jamey Dunn. “The report shows the continued deterioration of the state’s financial position. This report makes clear that Illinoisans continue to pay the price for the state’s disastrous budget impasse, in the form of late payment interest penalties and a state government that is weakened at almost every level by the inability to pay its bills on time.” Mendoza is a Democrat who has been critical of Rauner’s leadership.

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