Illinois fiscal alarms on coronavirus wounds rise as debt repayment looms
Without federal relief, Illinois’ fiscal prospects remain bleak with deep cuts on the horizon even as it’s managed to chip away at a multi-billion dollar bill backlog amid the COVID-19 pandemic, state Comptroller Susana Mendoza warns.
The state entered fiscal 2021 on July 1 with its bill backlog at $5.4 billion. By Wednesday, it slid to an even lower tab of $4.4 billion. The backlog, watched closely by rating agencies and investors as a sign of the state’s fiscal condition, hit a high of $16.7 billion on Nov. 8, 2017, as the state felt the full effects of a recently ended two-year budget impasse.
The backlog dropped to $9.2 billion after a $6 billion borrowing on Nov. 28 that year. The state entered fiscal 2019 with the backlog at $6.8 billion and it was down to $6 billion at the start of fiscal 2020. But the latest numbers are masked by borrowing that has helped keep bill payment on track and fiscal 2021 could put the state deeper in the hole.
Illinois in the spring cut its fiscal 2020 and 2021 revenue estimates by more than $7 billion due to the pandemic.
“Ending fiscal year 2020 with a bill backlog of $5.4 billion and a 40-day payment cycle for most bills for the first time in several years may give the impression that Illinois’ fiscal condition is not as grim as some observers may claim,” Comptroller Susana Mendoza writes in the newly published edition of “Fiscal Focus.”
“This current period of relative calm is unlikely to last given that more than $1.6 billion in borrowing will be due this fiscal year, and another $5 billion to $6.5 billion in expenditures will be submitted to the Illinois Office of Comptroller for payment — more than state revenues can support,” Mendoza warned.
The state entered the new fiscal year owing $2.6 billion in temporary borrowing for fiscal 2020 that helped keep the bill backlog in check along with an infusion of funding from the CARES Act signed March 27. The state’s share of direct aid totaled $3.5 billion. The state had spent $850 million on COVID-19 through July.
The $2.6 billion of borrowing included $400 million done through the state Treasurer investments’ program that was repaid late last month. The state still must repay $1.5 billion this year. That includes the $1.2 billion of note borrowing through the Federal Reserve’s short-term lending program known as the Municipal Liquidity Facility and $300 million owed to non-general fund accounts referred to as “inter fund borrowing.”
Another $361 million of inter fund borrowing is due to be repaid in fiscal 2022, $244 million in fiscal 2023, and $424 million in fiscal 2024.
The state will head deeper into the borrowing pit to balance on a cash basis the $42.9 billion fiscal 2021 budget. It relies on up to $5 billion off issuance through the MLF if federal relief isn’t forthcoming soon, and $300 million in additional inter fund borrowing. The state hopes to eventually repay this borrowing with federal help.
If voters in November don’t agree to amend the state constitution and allow the state to move to a graduated income tax from a flat rate, the state would tap $1.2 billion of GO issuance to cover fiscal 2021 expenses. The tax change calls for rates to go up on top earners, generating more than $3 billion annually.
“As Illinois considers the possibility of engaging in additional borrowing, it must be cautioned this is not ‘free money.’ It must be repaid,” Mendoza warned. "Adding some $6.5 billion in potential borrowing, especially with interest rates of more than 4%, to the $2.66 billion in short-term borrowing already owed would have consequences on Illinois’ financial outlook for years to come.
Mendoza, a Democrat, joins Gov. J.B. Pritzker, also a Democrat, in pressing the need for federal relief as President Trump and congressional leaders hash out a new stimulus package. The GOP is resisting Democratic efforts to include direct local and state aid to cover pandemic-driven tax losses.
“There certainly will be significant cuts that will have to be made to life safety, to education, to so many things that I care really deeply about,” Pritzker said Monday. “But this is going to be up to Congress. They're the ones who have the ability to help us and to help all 50 states with the challenge we all have.”
Lawmakers have warned of a 35% across-the-board cut. The state headed into the pandemic without reserves to serve as a cushion and a $137 billion pension burden weighing on its ratings and balance sheet.
Illinois can ill afford to lose ground with its ratings just one cut away from junk. Fitch Ratings, Moody’s Investors Service and S&P Global Ratings all assign the state a negative outlook.
Mendoza also highlighted the state’s growing borrowing costs as a sign of its stress as rates had stabilized and spreads had narrowed before the pandemic.
The state is paying nearly 4% to borrow through the MLF, a rate based on its ratings. Its spreads hit highs in June of more than 400 basis points to the Municipal Market Data’s AAA benchmark. The spreads shrunk through June and July and were at 197 bps on the one-year, 226 bps on the 10-year, and 211 bps on the 25-year bond Tuesday compared to May 29 when the spreads were at 400/417/417.
While some states are well-positioned to manage the volatility, Illinois’ weaknesses and the uncertainty ahead are underscored in a national overview of states: “Pandemic Upends U.S. State 2021 Budgets” published Wednesday by Fitch Ratings.
Two states long on Fitch's "States to Watch" list, Illinois and New Jersey, are both considering sizable deficit financing to address the fiscal implications of the downturn caused by the coronavirus, Fitch noted.
"Illinois' adopted fiscal 2021 budget serves as a fiscal placeholder with answers to key questions around federal actions, state expense management and voter sentiment expected over the next several months," said co-author Karen Krop, a senior director. “This reliance on $6.6 billion in non-structural or uncertain measures in the approved fiscal 2021 budget, a high 15% of total general funds expenditures, reflects the depths of the state's fiscal challenge.”