Rauner puts full-year Illinois budget atop agenda for leaders' meeting

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CHICAGO – Illinois Gov. Bruce Rauner will meet Thursday with legislative leaders as lawmakers return to work amid warnings that further political dysfunction would pose a threat the state’s barely investment-grade rating.

Rauner announced his plans for a rare meeting of the four leaders at a news conference Monday, during which he called passage of a full year’s balanced budget his top legislative priority. Both chambers were back in session Tuesday following a spring break and the March primary election.

The state’s two-year budget stalemate dragged Illinois’ ratings down to the weakest among states. The impasse ended last July when some Republicans broke with Rauner and joined the General Assembly’s Democratic majority to enact a $36 billion budget package with $5 billion of tax increases.

Rauner said talks at the leaders' meeting will first center on “getting a balanced budget, a truly balanced budget for a full year, not a partial year – a full-year balanced budget with no new taxes that lives within our means.”

“That’s number one, first priority,” he added. The session formally ends at the end of May after which a higher majority is needed to adopt legislation for it to take effect immediately.

Rauner said he wants leaders to agree on a certified revenue estimate and use it to settle on a final plan. The administration and legislature’s Commission on Government Forecasting and Accountability have offered up similar estimates for the next fiscal year.

Democrats rejected the notion that they might try to press forward with a temporary plan to see the state through early 2019 in hopes that Democratic challenger J.B. Pritzker will defeat Rauner in November and be inaugurated early next year.

“The Senate president is looking for stability, so people and businesses can plan and grow,” said John Patterson, spokesman for Senate President John Cullerton, D-Chicago.

Market participants are watching closely to see if Rauner and Democrats can reach a deal that’s sound enough to prevent the current $8 billion bill backlog from rising and doesn’t rely on measures that hurt pension funding levels. Both are factors that could drive a downgrade.

The state must close a remaining $600 million deficit in the current fiscal year and faces a $1.5 billion structural gap heading into fiscal 2019. Rauner has proposed a $37.6 billion fiscal 2019 budget that relies on a tax increase to raise revenue, despite his opposition to personal and corporate income tax rate hikes. He has proposed some of the state’s pension funding obligations be shifted to local schools and universities.

“Fitch expects budget passage to be difficult,” Fitch Ratings wrote of Rauner’s proposal in a report published ahead of the state’s $500 million competitive general obligation sale scheduled for April 25. “A re-emergence of political stalemate that negatively affects fiscal operations, including a material increase in accounts payable, could trigger a downgrade.”

Fitch affirmed the BBB rating that applies to $31 billion of GO debt. It assigns a negative outlook.

“Illinois has demonstrated a repeated inability to address its structural challenges due to an absence of consensus and resistance among key stakeholders," Fitch wrote. "The political environment in the state remains a negative rating consideration.”

Moody’s Investors Service and S&P Global Ratings affirmed the state’s Baa3 and BBB-minus, respective, ratings last week. Both are at the lowest investment grade level. Moody’s assigns a negative outlook and S&P a stable one.

Rauner on Monday laid out a series of other priorities, including several from his previous “turnaround agenda” that has so far fallen flat with the Democratic majority. They include local government contracting and wage reforms, property tax reforms and legislative term limits.

Rauner is also pushing for adoption of Cullerton’s “consideration” pension model that asks employees to accept cuts in exchange for future pay raises being counted toward their pensionable salary. If it passes and survives the threatened legal challenge, Rauner wants to use an estimated $1 billion in annual savings to roll back a portion of the 2017 tax increases. The legislation previously passed the Senate but stalled in the House.

He will also press for changes in an existing business tax credit program. On infrastructure, Rauner will propose legislation to accelerate road projects by using a design-build model and he wants to expand the use of public-private partnerships.

Illinois faces higher borrowing costs when it returns to the market later this month as its spread penalties have steadily widened since its last sale in November and yields are generally up. Market participants say the state’s rising spreads reflect uncertainty over the potential return of gridlock and growing anxiety over the extent of the state’s fiscal ills.

The spread between Illinois 10-year GOs and the Municipal Market Data’s top-rated benchmark rose to a high of 213 basis points late last week. It began March at a 197-basis- point spread and was 177 basis points at the start of 2018.

The 10-year on the state’s last primary bond sale in November paid a yield of 3.91%, for a spread of 170 basis points. The spread had hovered in the 270- to 290-basis-point range last June as the new fiscal year neared and the threat of a cut to a junk rating loomed without a budget, and hit a low of 168 basis points last October.

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