CHICAGO – The Illinois House’s Democratic and GOP leaders talked up compromise Monday but it remains uncertain whether either side will budge enough to get a budget deal done this week and avert a likely downgrade to junk.

Breaking Illinois’ two-year-old budget stalemate hinges on a local government property tax freeze and worker’s compensation and pension changes, the House’s GOP minority leader Rep. Jim Durkin, R-Western Springs, said Monday.

Negotiations to “hammer out a final product” on each issue between GOP members and members of House Speaker Michael Madigan’s caucus are ongoing, Durkin said.

Attempts to water down changes sought by Gov. Bruce Rauner and his fellow Republicans “will make my job exceedingly difficult,” Durkin said. Madigan, a Chicago Democrat, wants the GOP to put up at least 30 of their 51 votes in the 118 member chamber on a budget package with tax increases.

Michael Madigan, speaker of the Illinois House of Representatives in Springfield, Illinois on Feb. 18, 2015.
“If Gov. Rauner is reasonable on these issues, then we can finalize an overall agreement," Illinois House Speaker Michael Madigan said Monday.

A three-fifths supermajority of 71 is needed for legislation to take effect immediately outside of a regular session. The special session called by the Republican governor ends Friday.

“This is the pathway to breaking the impasse and bringing this to a fair resolution,” Durkin said. The GOP considers House-approved worker’s compensation reforms too weak.

Durkin said term limits are not off the table but they are not the focus of negotiations. The GOP has also dropped demands for other local government changes on prevailing wage and contract requirements Democrats consider to be anti-union.

The minority leader also reiterated his weekend call for Madigan to unveil a fiscal 2018 spending plan. “Our cards are on the table….we now need to know where the House Democrats” will be on these extremely important issues,” he added.

Senate Democrats have approved a $37 billion plan and enjoy a three-fifths supermajority there. The House and Senate GOP members have endorsed a $36 billion Rauner-backed plan. Madigan has not shown his hand yet.

Durkin said he remains open to negotiations on a series of items Madigan announced over the weekend he wants included in any final legislative package. Durkin also said he considers the status of negotiations “positive” and is hopeful that a framework for an agreement can be reached in the coming days.

Later in the day, Madigan and lead budget negotiator Rep. Greg Harris, D-Chicago, said Democrats were close to finalizing a budget plan with spending and tax proposals, suggesting it might be ready for review at a leaders’ meeting Tuesday. The Democratic version of a local property tax freeze was expected to be released in committee early Tuesday.

“There can be a settlement,” said Madigan, but the difficulty lies in the two sides reaching agreement on revenue hikes and whether Democrats will go far enough to accommodate Rauner’s policy demands to win the needed GOP votes.

“If Gov. Rauner is reasonable on these issues, then we can finalize an overall agreement. The responsibility will lie upon the Republican leaders,” Madigan said.

If the House comes to an agreement it would then have to negotiate with the Senate which was close on most budget and policy issues with the length of the income tax hike and local property tax freeze being the key sticking points.

If a budget agreement isn’t reached before the new fiscal year begins Saturday that deals with a $6 billion deficit and $15 billion bill backlog, the state faces the prospect of losing at least one of its investment grade ratings, a historic event for a sovereign state.

The impasse has primarily been driven by Rauner’s demand that Democrats agree to his non-budgetary governance and policy items like term limits, a local property tax freeze, redistricting and worker’s compensation reforms in exchange for supporting tax increases.

After a rare leaders meeting Sunday, Madigan told the GOP he would negotiate on their items if they support Democratic endorsed non-budgetary bills. The items include overhauling state education funding formulas, applying procurement rules to an overhaul of the state’s Medicaid managed care program, and regulating worker’s compensation insurance rates.

Rauner has endorsed most of the education bill but warned he would veto it because he believes it is too favorable to Chicago Public Schools.

The Senate Democratic and GOP budget plans each rely on about $5 billion in tax increases but the two sides have strong disagreements. The GOP is seeking to limit an income tax hike to four years and tie it to a four-year local property tax freeze. The Senate Democrat plan makes the hike permanent and limits a local freeze to two years. It’s unknown what Madigan would support.

S&P Global Ratings downgraded the state’s rating earlier this month to BBB-minus after the regular session ended May 31 with no budget action and warned the state of the likelihood of another without a budget fix by July 1.

Fitch Ratings has said a downgrade looms if the state doesn’t break the logjam by July 1, but whether it will drop the state by one notch to BBB-minus or two notches into junk is not known. Moody’s Investors Service dropped the state to Baa3 earlier this month and assigns a negative outlook.

Lawmakers headed into the final days of the session amid growing accreditation risks for its battered public universities.

Illinois’ nine public universities are among the hardest hit by the impasse as they’ve suffered with reduced aid which then fully dried up Jan. 1. Only the flagship University of Illinois and Illinois State University retain investment grade ratings.

“The continued lack of such funding places the higher education system of Illinois at considerable risk and is injurious to the very students the system purports to serve…I must warn you about the accreditation consequences of the failure to provide sustainable funding for Illinois higher education,” Higher Learning Commission president Barbara Gellman-Danley wrote in a letter late last week to Rauner and legislative leaders.

The commission serves as the regional accrediting agency for 19 states and serves is the gatekeeper for federal student financial aid including more than $4 billion distributed to Illinois students in the last school year.

Students are facing higher tuition while universities are struggling with reduced enrollment, faculty losses, cancellation of programs and capital projects, the loss of grants, and depleted or diminished cash reserves. “To maintain accreditation, institutions are required to show the availability of appropriate financial, physical, and human resources,” the letter said.

Illinois’ bonds have been trading at punishing spreads. Last week, the state’s 10-year general obligation bond was trading at a 273 to 290 basis point spread to Municipal Market Data’s top-rated benchmark. That’s down from a high of 335 bp after an adverse court ruling earlier this month.

Lawyers for Medicaid recipients and the attorney general’s office return to court Wednesday for a status hearing on negotiations over how to speed up payment on a more than $2 billion Medicaid bill backlog.

A federal judge warned the state it’s in violation of existing consent decrees. The state comptroller has warned that it barely has the cash to meet current priority payment demands like debt service, payroll, and pension payments.

The state’s inability so far to resolve its budget mess despite a steady fall in ratings doesn’t bode well for the market overall, Court Street Group Research said in a recent report.

Historically, lawmakers have tended to compromise in order to fix budget woes with such threats looming.

“That doesn’t appear to be happening at all in Illinois, a pattern which cannot be considered anything but bad news for the municipal market as a whole,” the report said.

One reason may be growing tensions between political parties and a reduced willingness or capacity to compromise.

“We have certainly seen this growing divide affect Federal Congressional behavior, but we are now concerned that these factors may create more frequent budgetary intransigence in some states as well, in ways that could affect credit quality and ratings,” the report said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.