Bruce Rauner faces a possible shutdown of Illinois Department of Transportation projects July 1, without a funding appropriation in place.

CHICAGO -- The pleas from Illinois' local governments, schools, and state agencies for at least a stop-gap spending plan are growing louder, as the state careens toward the start of a second fiscal year without a budget.

Gov. Bruce Rauner, a Republican, and the General Assembly's Democratic majority shifted course after the regular spring session ended May 31 without passage of a balanced budget in place and are attempting to reach agreement on a Band-Aid plan to see the state through a contentious November election and into January.

With investors clamoring for a solution and the state's ratings still under threat after a spate of downgrades earlier this month, some stakeholders in the budget impasse are bracing for what Rauner warned Thursday is a "crisis" that will ensue if new appropriations aren't in place by July 1.

"The continuing political stalemate increases the odds that the state's failure to pass a budget will choke the weakest local governments and organizations that depend on the state for funding," said Richard Ciccarone, president of Merritt Research Services.

"Although many school districts in the state carry high balances and have limited reliance on state aid, that's certainly not the case for all," he added. "More rating downgrades are likely. Most of the state universities are already facing liquidity strains which could lead to more serious issues likely to worry both rating agencies and investors."

Rauner is pushing two Republican sponsored bills to fund schools and other services. Legislative working groups are meeting, but agreement on even a short-term solution has remained elusive between the GOP and House Speaker Michael Madigan and Senate President John Cullerton, both Chicago Democrats.

"The bipartisan working groups of legislators will meet three times this week, continuing their efforts to achieve a compromise on the state budget," Madigan said in a statement this week. He has cancelled the Wednesday sessions he initially said he would be called in June but on Thursday both Madigan and Cullerton announced their chambers would be in session on June 29. Sources said an agreement is close on stopgap operating funding.

"We are a critical juncture today," Rauner said after an appearance at the annual meeting of the Illinois Taxpayers' Federation Thursday in pushing for Democratic support for the stopgap funding and education spending. "We're on the verge of crisis. It's not a long term solution….but it gets us through this crisis" until after the elections.

While an agreement is close on funding operations, Rauner accused Democrats of blocking a final agreement over a demand for a school funding overhaul that would benefit CPS. "They are going to hold up everything" for what amounts to a CPS "bailout" that is unfair to taxpayers outside Chicago.

Rauner reiterated his opposition to the Democratic proposal and called on the district to either renegotiate its labor deals, seek a property tax hike, or consider bankruptcy although the state doesn't current permit such a filing for the district.

 

EDUCATION

About 90% of state spending continues unabated as debt service and pension payments are made from continuing appropriations and court orders, and consent agreements free up other funds. Rauner signed off on public kindergarten-through-12th grade aid for fiscal 2016, while a bipartisan agreement freed up a portion of public higher education funding and other spending.

That's not the case for fiscal 2017. Moody's Investors Service earlier this month put the University of Illinois and six other state public universities under review for downgrade. Moody's, which has previously downgraded the universities over their fiscal challenges due to the state, rates approximately $2.3 billion of public university debt.

In special legislation approved in the spring allocating $600 million, the state's 39 community colleges and nine public universities received about 30% of their aid, far short of what schools warned was needed to stave off cuts and staff layoffs, or to prevent the early closure of one school.

S&P Global Ratings has five of the state's public four-year universities it rates on CreditWatch.

Higher education officials warned at an Illinois Board of Higher Education meeting this week that the negative headlines have hurt their student and staff recruitment efforts and planning for the new school year. The Higher Learning Commission, which accredits the universities, is watching developments.

Local school districts which would be funded under the short term budget have warned that without state aid in place they are hard-pressed to plan, and that some could struggle to open this fall. Rauner wants to provide a small funding increase, but Democrats are pressing an overhaul of school funding formulas with an eye on increasing aid to schools with a higher enrollment of poor students.

Rauner dismisses the proposals as a "bailout" for Chicago Public Schools, which would receive $300 million more in aid and $200 million for teacher pension payments.

Chicago Mayor Rahm Emanuel joined with 16 other mayors in penning a June 19 letter to Rauner blasting state aid levels.

"Unfortunately, our current school-funding system penalizes the children from our communities. This is both morally indefensible and a threat to the future of Illinois," the letter reads. "Maintaining the current funding formula for another year will only exacerbate this crisis."

Other mayors offered a counter: "As this budget stalemate continues, we need a plan to ensure funding for schools and local government until a comprehensive budget resolution can be reached," read a column signed by more than three dozen mayors this week.

 

CAPITAL PROJECTS

Work will grind to a halt on state road projects, and other capital maintenance needs will be further delayed threatening the condition of some facilities, if July 1 comes without an appropriation. That will drive up cost.

"We are on the brink of what was once unthinkable … the suspension of the IDOT construction program," Randy Blankenhorn, secretary of the Illinois Department of Transportation, said last week of 800 active projects, worth $2 billion.

Capital projects now underway face a work stoppage next month that threatens conditions at some state facilities, and the state won't be able to fully put proceeds of last week's bond sale to work.

The Illinois Capital Development Board had to suspend 200 projects due to a lack of appropriation in the current fiscal year amid a prolonged state budget impasse, and that threatens to worsen conditions at state prisons, mental health facilities, and veteran's homes, said Executive Director Jodi Golden.

 

LOCAL UNITS

Passage of special legislation last December freed up $3 billion of revenues that go to local governments, but for fiscal 2016 only. The funds have little connection to the state general fund but their flow was choked off by the lack of appropriation, in some cases driving downgrades.

The special legislation released motor fuel tax, gambling, and emergency surcharge revenues to local governments which rating agencies called a positive. The legislation allowed for the distribution of $583 million in motor fuel taxes, $340 million in so-called use taxes, $154 million for 9-1-1 call centers, and $145 million in local governments' share of casino and video gambling revenues.

In October, Standard & Poor's dropped Chicago's $270 million of motor fuel-tax backed bonds six notches because stoppage. S&P downgraded the credit to BBB-plus from AA-plus. Moody's already linked the rating on the city's motor fuel bonds to the city's general obligation rating of Ba1.

Casino gambling revenues represent a significant source of funds for a handful of municipalities, Moody's said. The four cities rated by Moody's maintain healthy operating fund balances of more than 25% of revenues that helped bridge the temporary stoppage in the flow of revenues.

The package also freed up $1 billion for lottery winners and other emergency funding but appropriations are needed for fiscal 2017.

Separate legislation approved last August allowed the Metropolitan Pier and Exposition Authority to make its bond payment but not before a steep credit fall. The authorization was packaged in a bill that also authorized the appropriation of $5 billion in federal funds.

The legislation permitted MPEA to draw from the account that holds pledged tax revenues to cover monthly payments to the bond trustee and to make its debt service payments. The failed transfer of monthly funds last July triggered a technical default. The authority lost its high grade ratings and is now rated one notch below the state – which is the lowest rated state and is now in the BBB category – to reflect appropriation risk.

 

STATE BILLS

Human and social services have been hit hard as much of the work done by private entities on the state's behalf is going unpaid, forcing some to halt services. A new United Way of Illinois survey found more than half of safety and mental health providers that serve the state can't fully meet the needs of their clients due to the impasse. More than half said they may close their doors within six months.

The state's bill backlog this week was approaching $8 billion and could top a past high of nearly $10 billion by June 30 as bills continue to be collected for fiscal 2016 during the first few months of fiscal 2017, the state comptroller has said.

The state owes $32 million for utilities at its prisons, and concerns are rising that eventually the lights will go dark. Food suppliers are providing services with little reimbursement so far. The Department of Corrections has sounded alarms that suppliers could pull their services.

The big backlog means higher costs for Illinois as interest accrues at 1% a month on some bills after 90 days while healthcare related bills accrue at a 9% annual rate. Illinois' delayed payment has cost $1 billion in interest penalties since fiscal year 2006, the Chicago Civic Federation said in a report earlier this year.

 

STOPGAP PLAN

While all factions want a long term solution, the interim bills pitched by the GOP would provide some near term relief by appropriating the remaining non-general revenue fund line items for the current fiscal year and use the state's rainy day fund to pay outstanding bills at various state agencies. It funds utilities, food and medical services at state prisons and other facilities, dipping into a human services fund for $458 million.

For fiscal 2017, it would fund early childhood and K-12 education, appropriate the fiscal 2017 road construction program paid for with motor fuel tax and vehicle registration fees and appropriate all federal funds.

It would appropriate non-general revenue funds for capital projects that were halted in mid-construction due to the lack of a budget and cover emergency repairs at state facilities.

It would also provide the appropriations needed to free up the tourism-related tax revenue that covers debt service payments for the MPEA and appropriations needs for the state's Civic Center bonds and Illinois Sports Facilities Authority bonds.

The interim package would provide $600 million from the Education Assistance Fund for Higher Education and appropriate $180 million from a human services fund to cover payments to human services providers not covered by court orders or consent decrees in fiscal 2017.

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