Illinois wrapped up its annual veto session with no let-up in the deep divisions between Gov. Bruce Rauner and his fellow Republicans and the Democratic legislative majority.

CHICAGO – Illinois Gov. Bruce Rauner and the General Assembly's Democratic leadership headed toward the New Year with a budget impasse still hanging over the state, after the annual veto session ended amid deepening political rancor.

The state's stopgap budget approved in June is set to expire come the New Year. That will leave cash-strapped universities and human services providers without funding as the already record $10 billion bill backlog barrels toward $13 billion by the close of the fiscal year June 30.

"To stabilize the rating, the state will need to address the fiscal 2017 budget following the election in November or at the latest during a January legislative session," Fitch Ratings lead Illinois analyst Karen Krop wrote in a report. It rates the state BBB-plus and has the rating on negative watch. "Failure to do so would result in a rating downgrade."

The stopgap was designed to get the state past the November election, making it easier for politicians to pass pension reforms and tax increases to help tackle a $5.3 billion budget gap and bill backlog. Tensions over the budget impasse intensified in the final days of the veto session. Rauner vetoed $215 million of funding for Chicago Public Schools' teachers' pension funding, and lawmakers left before finalizing approval of Chicago's pension legislation.

 

CPS Bill

Rauner's veto came after comments from Senate President John Cullerton, D-Chicago, asserting that the CPS funding was not directly linked to passage of state pension reforms as had been portrayed when it was approved as part of the stopgap budget legislation.

The Senate later succeeded in an override attempt, getting exactly the three-fifths majority of 36 votes needed. Another 16 members voted against the override.

The legislation moves to the House where its fate is on shaky ground. The House adjourned without acting and the clock is ticking with 15 days to vote. Democrats hold the narrow super-majority needed for a veto override to succeed, but some Democrats may not go along with House Speaker Michael Madigan, D-Chicago.

The $215 million covers the normal costs of teachers' pensions, which the state government currently covers for school districts other than CPS.

Rauner's veto message attacked the Democrat's comments, and he blamed Cullerton for forcing his hand. Leaders had been holding the bill back through a parliamentary maneuver to reconsider it, but Cullerton had sent it on to Rauner's desk.

"Today, President Cullerton suddenly denied that the leaders had agreed that this bill would depend upon first enacting comprehensive pension reform," Rauner said."Breaking our agreement undermines our effort to end the budget impasse and enact reforms with bipartisan support,"

Cullerton fired back.

"By acting in such haste, the governor has unfortunately set back [pension] negotiations that I believed were advancing. Even worse, he has potentially forced the layoff of thousands of Chicago teachers and district employees," the senate president said.

Cullerton's office later sought to further explain his comments. The agreement on CPS' funding was that Rauner would not sign the legislation unless state pension reforms were reached, and the clock had not yet run out for an agreement to be reached.

Ratings agencies and investors worried about the district's liquidity position and reliance on short-term borrowing have been watching to see whether the state comes through on the funding.

Moody's Investors Service weighed in Friday with comments from analyst Rachel Cortez, but no action was taken.

"If the veto holds, CPS' deficit net cash position could stand at over $1 billion when its fiscal year ends in June 2017. While the funds from a possible veto override would be positive for CPS, there would still be insufficient funding to alleviate the school district's severe liquidity issues," she wrote. "While CPS can still take steps to address its fiscal situation, its financial position remains weak and could further deteriorate."

While the district has not outlined a backup plan should the state dollars fall through and warned of the potential for dire cuts, it may have room to borrow under its credit lines if its cash flow otherwise remains on course.

The district carries junk ratings from Fitch, Moody's Investors Service, and S&P Global Ratings and low investment grade levels from Kroll Bond Rating Agency.

 

Budget/Pensions

Rauner and legislative leaders said Thursday they planned to meet over the weekend to work on a pension and budget deal.

Lawmakers are scheduled to return Jan. 9, two days before the new legislature is convened based on the November election results although they could be backed earlier.

Rauner continues to tie various policy and governance reforms to passage of a budget that probably would include an income tax hike and possibly other new revenues as well as cuts. He said he could agree to another stopgap plan if Democrats agree to term limit legislation as well as a permanent property tax freeze. He recently said worker's compensation changes are a top priority for any budget agreement.

Cullerton and Madigan oppose many of Rauner's reform proposals, which they argue are too friendly to business and would hurt the middle class. Rauner argues that they are needed to improve the state's economy.

Madigan said Thursday he wants a long term budget, not another stopgap. "The word stopgap was never used in the prior six budget bills. I'm suggesting a budget," the speaker said.

Without resolution of the political stalemate, Illinois' backlog could top $47 billion in fiscal 2022 if lawmakers. Pension contributions rise to $9 billion in 2022 from $7 billion this year. The state unfunded pension tab is $126.5 billion. 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.

The state is rated in the triple-B category by all three rating agencies.

 

City Pension Legislation

Chicago Mayor Rahm Emanuel's overhaul of the city's municipal and laborers funds was left in limbo after clearing a hurdle with the state House's bipartisan approval of the legislation, which is designed to save the funds from insolvency.

The House approved the measure in a 91-16 vote Thursday, the final day of the legislature's annual fall veto session. After intense lobbying to build up a vote big enough to overcome a potential veto by Rauner, Democrats were joined by some Republicans in supporting Senate Bill 2437.

"We are now one step closer to passing pension legislation that secures the retirements of city employees and retirees, while also protecting Chicago taxpayers," Emanuel said in a statement.

The Senate, which left without voting, is expected to return in the coming weeks to approve. Democrats enjoy a veto-proof majority in the Senate so it was the House vote that represented the main hurdle as Rauner has threatened a veto. "The governor cannot support this bill without real pension reform that protects taxpayers," an administration official said.

While House Republican votes could shift should they be called on to override a veto, the bill enjoyed widespread support. An override would require 71 votes. Democrats currently meet that threshold, but will lose it when the new legislature opens next year.

The legislation sets funding scheme changes for the municipal employees' and laborers' pension funds designed to stave off the insolvency expected under the current statutory contribution formula. It puts the funds on a path to a 90% funded ratio in 2057.

After a five-year ramp of increasing city contributions, the city commits to making an actuarially based contribution. The contribution schedule closely mirrors one previously approved by lawmakers for the city's other two funds, which cover police and firefighters. The city's combined $33.8 billion of net pension liabilities have dragged its ratings down.

Enactment of the state law would mark the final step in putting the city's pension fixes in place. If not enacted before the new legislature takes its seat, the legislation would have to be resubmitted.

The city is rated at a low of Ba1, junk level, to a high of BBB-plus.

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