CHICAGO – Illinois Gov. Bruce Rauner called the $38.5 billion fiscal 2019 budget state lawmakers approved Thursday “balanced” and said he will soon sign it.
Without the partisan rancor that marred the last three years of budget talks, the Senate on Wednesday and the House on Thursday voted overwhelmingly in favor of the budget bills. The House voted 97-18 on the appropriations bill and 100-14 on the implementation bill. The Senate voted 56-2 and 54-2 on the two bills, respectively.
“We started this year’s budget process with the common-sense goals of a full-year balanced budget and no new taxes,” Rauner said in a statement after the House vote. “With this budget, we can come as close as any General Assembly and governor in Illinois have in a very long time.”
Rauner called it a “step in the right direction, though it does not include much-needed debt pay down and reforms that would reduce taxes, grow our economy, create jobs and raise family incomes,” but said he would “be taking action quickly to enact the Fiscal Year 19 budget into law.”
The state has seen its spreads narrow in recent days and as the municipal bond market began digesting the news Thursday, traders further rewarded the state by further trimming spreads by at least 10 basis points in various maturities, said MMD market analyst Peter Franks. Multiple trades on the state’s 10-year bonds were down to a 170 bp spread from 185 bp Wednesday, according to MMD trade data.
Lawmakers from both chambers highlighted the bipartisan support and talked of the trust and willingness to compromise on both sides, allowing the budget to be completed on time, on the final day of the regular session. That marked a sharp departure from the barbs traded over the budget since Rauner took office in 2015.
The budget represents a “bipartisan agreement for first time in many many years” that provides “stability and predictability over the course of the upcoming year,” the House GOP's lead negotiator, Rep. Tom Demmer, R-Dixon, said during the House debate.
“We have a truly balanced budget which I’m hoping will pass the credibility test by outside folks when they look at it,” said the budget implementation bill’s sponsor Sen. Heather Steans, D-Chicago, on Wednesday.
Steans and others acknowledged that more work is needed to solve the state’s deeper long term fiscal woes. The package “doesn’t solve Illinois’ fiscal challenges” as it lacks plans to address the bill backlog that's expected to hit $7.7 billion at the close of the current fiscal year June 30, Steans said.
The budget package does rely on at least $1 billion being paid off from legislation that allows the treasurer to provide the comptroller with state investment dollars to pay down the backlog. It’s a tactic one independent analyst described as a shell-game.
Pension measures that trim $445 million from the state’s pension contributions – totaling $7.3 billion in fiscal 2019 -- are included but they don’t make a material dent in a $129 billion unfunded tab.
Municipal market participants had not been optimistic that lawmakers would tackle the state's daunting fiscal challenges ahead of November's election; instead the hope was that lawmakers would at least hold the ship steady and avoid getting the state's bond ratings cut to junk.
The partisan battles since Rauner took office reached a fever pitch last spring after two years without an enacted budget, as the state scraped by with piecemeal appropriations that would eventually drive the bill backlog up to a record of more than $14 billion. Moody’s Investors Service and S&P Global Ratings dropped the state to their lowest investment grade ratings on June 1 after the session ended without a budget.
In July, a handful of GOP members bucked the governor and joined Democrats in approving a budget that included an income tax hike. The promise of more than $4.5 billion in new tax revenue staved off further downgrades.
The new revenue eased pressures and tensions this year. Lawmakers also appeared more guarded, concerned over how their words and actions would weigh on voters with the looming elections. In recent days both Rauner and House Speaker Michael Madigan, D-Chicago, have remained mostly silent. Madigan had long been the subject of Rauner’s harshest attacks.
The budget has its critics. The bills “continue the carnage” said Rep. David McSweeney, R-Barrington Hills, referring to the lack of tax cuts or more substantial pension reforms. “We are insolvent.” Critics said the budget is not truly balanced and lacked rank-and-file input.
Still, the headlines have gone over well with the muni market. After demanding a steeper yield penalty on the state’s last general obligation sale late last month, spreads have narrowed, which market participants attribute to headlines over the improved prospects for a budget agreement. The 170 bp spreads reported Thursday are improved from the 205 bp spread on the 10-year maturities in the April sale and a 202 bp spread on May 1.
The budget package totals $80.3 billion when all funds including federal dollars are counted and includes a $38.5 billion general revenue fund, up about $600 million from spending this year. The budget provides $1.3 billion to cover past spending incurred by the state that didn’t have the needed appropriations to pay. The state is projected to end the year with a small surplus.
Illinois will spend $8.3 billion on K-12 education, up by $400 million from this year with about $350 million going to cover new costs from last year’s school funding overhaul. No district would lose money.
Higher education will receive $1.79 billion, an increase of $60 million. Human services spending will total nearly $14 billion and $24.2 billion will go to Medicaid-related costs.
The budget eases some pain imposed this year on local governments. A 2% administrative fee on local governments’ share of sales taxes is being reduced to 1.5% providing $20 million more for locals.
A 10% cut this year to local government distributive funds – state revenues shared with local governments – will drop to 5% resulting in $100 million more for locals.
The capital budget incorporates new and reauthorized projects and totals $19.4 billion, relying on $800 million of borrowing. About $2.5 billion is earmarked for transportation, $54 million for the initial costs for a new veterans home, and $172 million for President Obama’s presidential library in Chicago.
A roughly $1 billion spending gap was wiped out through the pension and other savings, reforms and other measures including the use of $800 million in interfund borrowing, although that must be paid back over two years, according to a statement from Senate President John Cullerton, D-Chicago.
The plan does not rely on the governor’s proposal to phase in a shift in some state pension costs to local school districts and the higher education system. That’s especially good news for Chicago Public Schools.
State pension contributions will total $7.3 billion. The budget's $445 million of pension-related savings comes from three pension measures.
One is a voluntary buyout program being offered to vested but non-active tier one members of three of the state’s five pension funds who no longer work for the state. It’s estimated to save $41 million.
A second voluntary program offers a cost-of-living adjustment buyout for retiring tier one employees that would reduce their 3% compounded COLA to a simple 1.5% COLA in exchange for an accelerated payout with savings estimated at $382 million.
A reduction in the state’s cap to 3% from 6% on salary spiking before retirement is supposed to generate $22 million in savings with local employers such as a public college or school district required to cover the amount above the cap.
The savings projections come from state pension fund actuaries and three funds would need to recertify their fiscal 2019 funding requests.
Whether analysts and budget watchdogs will reach the same conclusion as lawmakers on the budget’s “balanced state” remains to be seen.
The budget relies on some one-shots like $300 million from the sale of the state’s downtown Chicago headquarters and other revenue sources that are uncertain like the pension savings.
It also does not account for some expenses including payment of previously withheld pay increases based on experience that the courts have said the state owes workers. Estimates of the cost have run as high as $400 million.
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Updated May 31, 2018 at 11:08AM: The story was updated with newer secondary market trading data.
Updated May 31, 2018 at 3:32PM: The story was updated after the budget bills passed the House and Rauner said he would sign them.