CHICAGO – The end of Illinois' two-year budget drought does not bring an end to the liquidity pressure facing the state.
A series of veto overrides Thursday enacted the budget, so road projects will resume and aid will again flow to public universities and social service agencies, but only at a trickle because state coffers remain bare.
Without a budget, the state government spent many billions more through continuing appropriations and legal orders than it took in through tax revenue, a central factor behind a ratings slide that left $26 billion of general obligation debt on the verge of junk.
The fiscal 2018 budget package counts on $5 billion in new revenue primarily from an income tax hike that’s retroactive to July 1, but the eventual cash infusion won’t make a quick dent in a stack of delinquent bills that has swelled to $14.7 billion.
“This budget will not solve all our problems tomorrow. We haven’t won the lottery. We lost it and haven’t even gotten it back yet,” state Comptroller Susana Mendoza, a Democrat who lays the blame on Gov. Bruce Rauner for the ballooning backlog, said in a statement Thursday after the vote.
The budget package – opposed by Rauner because it raises taxes without freezing local property taxes or overhauling worker’s compensation rules -- includes measures to pay down the bill backlog by as much as $8 billion. It relies on cash flow borrowing, dipping into non general fund accounts, and leveraging federal Medicaid dollars.
The approved plan only supports $3 billion of $6 billion in authorized GO borrowing to tackle the backlog, which must be undertaken by Gov. Rauner’ administration’s finance team. The administration did not respond to a request for comment on its support for the cash flow borrowing. The administration has been talking to local bankers, financial advisors, and bond lawyers about a separate cash flow financing aimed at paying down a few billion of the backlog, according to sources.
Mendoza has warned her office will fall $185 million short of what it needs in August to meet $1.85 billion of core priority obligations. That’s before accommodating a federal judge’s order late last month that the state must begin paying nearly $600 million of Medicaid-related bills monthly while also chipping away at a $3 billion backlog of vouchers.
“The bond rating agencies can rest assured the state can continue honoring its commitments to bond-holders and the pension funds,” she added. Mendoza has not said in detail what core priorities would be cut to accommodate the Medicaid order.
The backlog pain reaches across the state, hurting school districts like Chicago Public Schools that rely on delayed block grants and local governments that rely on shared aid and other revenue doled out from Springfield. Some local governments and universities have seen their ratings tumble. Only two of nine public universities retain investment grade ratings.
Fiscal watchdogs said adoption of a budget after two years of gridlock is a positive step toward stabilizing the state’s finances but a long road lies ahead to cure the state’s deep fiscal ills.
The list of challenges is led by the vast bill backlog and $126.5 billion of unfunded pension obligations. The deep political rancor between the Republican governor and General Assembly’s Democratic majorities with the 2018 elections ahead won’t help.
“It is a building block by which the state can move forward. It is not a panacea but it is far better for the state of Illinois to move forward with a budget then it would be to roll the dice and see what the downgrade leaves us with if we go into non-investment grade as the rating agencies have threatened,” said Laurence Msall, president of the Chicago Civic Federation.
“It certainly doesn’t solve all the state’s problems” but it is “a step toward stability,” the Center for Tax and Budget Accountability’s executive director Ralph Martire said. The “big unanswered” question is the state’s pension burden. The organization has recommended re-amortizing the state’s current payment schedule.
Martire also stresses that no budget proposed by either side is truly balanced as none account for the backlog. Martire and Msall made their comments Thursday on WBEZ’s Morning Shift radio program.
While Fitch Ratings and S&P Global Ratings have issued initial positive commentaries on the budget package – which lawmakers believe will stave off a rating hit -- Moody’s Investors Service put the state on review for a downgrade Wednesday citing concerns over implementation risks, the lack of measures to bring down the pension liabilities, and prevent a further buildup of bills. A one-notch cut from Moody’s would leave the state at junk.
The final Thursday vote culminated a tumultuous week at the capital. It began with an initial bipartisan budget appropriation vote on the Friday headed into the holiday weekend. Talks then broke down on a final agreement that included a local property tax freeze and worker’s compensation.
House Speaker Michael Madigan, D-Chicago, brought the package’s three bills that cover spending, cuts, tax hikes, and authorize borrowing up for a vote Sunday. They narrowly passed with one vote to spare to meet the required three-fifths supermajority of 71 after 15 Republicans broke ranks with Rauner and joined the Democratic majority.
Action moved to the Senate on Tuesday where one GOP member joined with Democrats to reach the needed three-fifths supermajority for the tax bill to take effect immediately and survive the threatened veto.
Rauner quickly vetoed the bills. The Senate then successfully overrode Rauner, setting the stage for the House vote. Lacking sufficient members, Madigan waited until Thursday to call the bills.
Debate was limited to the tax package and it passed narrowly with the required 71 votes, down from the original 72. Madigan lost five of the 15 GOP votes, but four Democrats who had originally voted against the taxes flipped on the override vote.
Much of the debate came from GOP members laying out their positions for and against the package. The state’s likely historic cut to junk played prominently as did Moody’s warning that a fall to junk could still lie ahead.
After the overrides, Rauner attacked the package.
“Today was another step in Illinois’ never-ending tragic trail of tax hikes," he said in a statement. "Speaker Madigan’s 32% permanent income tax increase will force another tax hike in the near future. His tax-and-spend plan is not balanced, does not cut enough spending or pay down enough debt, and does not help grow jobs or restore confidence in government.”
The package calls for spending $36.1 billion, which is less than the $37.3 billion proposed by Rauner earlier this year. Budget backers also highlight that much of it was crafted through bipartisan negotiations.
The plan trims $2.5 billion in spending, including a 5% cut in state agency costs, with higher education taking a 10% hit. It relies on $1.5 billion in savings from pension changes, which were originally proposed by Rauner. They limit end-of-career pension spiking and phase in accounting for actuarial changes. The plan also implements a Tier 3 defined benefit and defined contribution pension plan for current Tier 2 members. While it would trim state contributions it would not have much of an impact on liabilities.
The tax package raises more than $5 billion in new revenue. It lifts the personal income tax rate to 4.95% from 3.75% to generate $4.45 billion annually and the corporate income to 7% from 5.25% to generate $514 million. Closing some corporate tax loopholes raises another $125 million and a sales tax discount for ethanol blended gasoline is dropped to generate $100 million.
The state currently spends about $39 billion while collecting just $32 billion to $33 billion.
GO borrowing to pay down the bill backlog would allow the state to not only speed up long overdue payments but also to pare down its interest costs on the overdue payments. Mendoza has estimated the current backlog carries an $800 million interest costs.
Under the state’s Prompt Payment Act, most bills that are more than 90 days old accrue interest at 1% per month, or 12% annually, while bills from healthcare providers accrue 9% after 30 days under the Illinois Insurance Code. Based on current trading levels, the state could lower the interest rate to the 4% range on a financing.
Other pieces of the budget remain in flux and could result in further showdowns between lawmakers the governor. The package includes a “poison pill” provision on general state aid for K-12 education.
The provision allows for distribution only under a new evidence-based model such as the one included in a Democratic-backed bill overhauling education funding. The administration has said it supports 90% of the bill but Rauner threatened a veto because he believes it’s too favorable to Chicago Public Schools. The cash-strapped district could receive $300 million more under a new formula for both aid and pension help. Some districts have warned they can’t open without the aid.
Both sides talked of returning to the table to work on additional legislation on education, pensions, and Rauner’s various proposals during the House debate but whether such cooperation will pan out remains to be seen.
Ahead of the Thursday vote, Senate President John Cullerton, D-Chicago, highlighted the need for more action. “This specific budget crisis will finally be over, but not our need to compromise and work together,” he said during a breakfast address at the Chicago City Club.
But his speech also underscored the deep acrimony as he suggested Rauner was already readying a new round of attack advertisements. “We essentially wasted two and half years fighting over the state budget only to now be on the verge of the General Assembly taking control of the situation and forcing a budget on the state because of the governor will not engage,” he said.
And while the tax hikes will bring in new revenue, the Commission on Government Forecasting and Accountability’s latest report offers a dim assessment of revenue collections. Base state revenue receipts were down $968 million, or 3.2%, for fiscal 2017 due to both lagging tax collections and federal dollars.
Chicago also scored a victory in the package’s passage. It was able to bypass a threatened veto by Rauner of its overhaul of the municipal and laborers’ pension funds by including it in the budget implementation bill that was part of the package.