Illinois' meager budget progress hinges on progressive tax
Illinois Gov. J.B. Pritzker’s proposed budget makes some modest progress in the right fiscal direction if voters allow the state to move to a progressive income tax structure, S&P Global Ratings said.
S&P “considers the Illinois governor's fiscal 2021 budget proposal a step toward improving structural balance, building liquidity, and addressing pension liabilities, although it is a very small step,” analysts wrote in their first commentary on the $42 billion general fund budget Pritzker unveiled last month.
S&P rates the state the lowest investment grade level of BBB-minus with a stable outlook.
The budget proposal lacks gimmicks used in the past that helped balance the budget on a cash basis instead relying on recurring revenues to fund recurring expenditures. It also relies on reasonable economic assumptions to achieve “current year structural stability,” S&P said.
While the Democratic administration has called the budget balanced, S&P said such a label would require the state make pension payments based on an actuarial assessment. The state’s statutory payments fall short of that level.
Plans to deposit $50 million in fiscal 2020 and $50 million in fiscal 2021 into a depleted reserve are positive steps but the 2021 deposit hinges on passage of the graduated tax constitutional amendment on the November ballot and the balance would remain lean.
“We have cited the lack of reserves as a limiting credit factor in the past, and so while still a very small potential offset to revenue declines, these actions are mildly positive,” S&P wrote. “In our view, the low reserve position, combined with high fixed costs and the elevated bill backlog, makes the state more vulnerable to economic downturns and projected out-year gaps.”
Another positive is the $100 million supplemental pension contribution on top of the state’s roughly $8.6 billion payment from the general fund. “Although this is a move in the right direction, the amount is still not meaningfully above the statutory level being funded and keeps the target funded ratio at 90% by 2045, considerably slower than that of higher-rated peers,” S&P wrote.
The budget would leave a $108 million surplus after funding key spending priorities that provide $604 million more for education and $673 million for human services. Some of the state’s roughly $7 billion bill backlog would get 10% of recreational cannabis taxes but it’s nominal.
The big “if” on whether the state can make those modest fiscal gains rests with voters. If they reject the progressive tax constitutional amendment the state would withhold $1.4 billion in planned spending that includes not making the supplemental pension contribution or rainy day fund deposit. The state would also scale back proposed education funding increases, cut local government tax sharing, delay corporate tax refunds, and push off employee healthcare payments.
“Proposing a budget with this level of revenue uncertainty raises credit risks, but the passage of the graduated income tax is the administration's primary goal,” S&P said. “Some holdbacks could shift risk to other governmental units or be difficult to not fund because they are not fully discretionary.”
S&P would view passage of the amendment as a “further step toward fiscal progress” absent large expenditure reductions since it would generate about $1.5 billion in fiscal 2021 and then $3.6 billion in fiscal 2022 and going forward by raising rates on top earners.
Whether voters approve the tax change or not, the state isn’t close to winning an upgrade. “While we anticipate stability in the near term, we do not expect the current or proposed budgets will materially improve the state's credit profile, as the overall liquidity position and funding of pension and other post-employment benefit obligations remain below those of higher-rated peers, and the bill backlog remains significant,” S&P said.
The state has $137 billion of unfunded pension liabilities and a $54.5 billion unfunded OPEB.