CHICAGO — The Illinois General Assembly's failure to extend the 2011 income tax hike ahead of its partial expiration next year could negatively pressure the state's already weak credit rating if its bill backlog grows, Moody's Investors Service said in a special commentary.
The commentary was released in the wake of the General Assembly's approval of a $35.7 billion fiscal 2015 budget that did not make permanent the current tax rates, as proposed by Gov. Pat Quinn.
To avoid deep cuts, the budget relies on one-shots like interfund borrowing and payment delays to offset the anticipated loss of $1.8 billion of income tax revenue next year when the 2011 tax hike partially expires.
"As a result, Illinois could face a structural deficit that leads the lowest-rated US state to rely on credit-negative practices such as increasing an already large backlog of unpaid bills to achieve balanced financial operations, reversing significant progress of recent years," Moody's wrote. "Growth caused by unbalanced budget is credit negative."
Moody's rates Illinois A3 with a negative outlook. State lawmakers are expected to revisit the tax question after the November general election.
Democratic lawmakers who control the General Assembly have acknowledged the adopted budget will fall short of fully funding services and Quinn has warned the budget "postpones the tough decisions." Moody's said it is awaiting additional state analysis in the coming week on the actual size of the structural gap.
Quinn proposed both a "recommended" general fund budget of $38 billion and a not-recommended plan that slashed current spending of $36.6 billion by $2 billion. He could move to cut spending using his line item veto on the adopted budget by June 30.
The revenue loss in fiscal 2015 is modest compared to 2016 as the tax-rate roll back occurs halfway through fiscal 2015. The deeper losses could further pressure the state's ability to pay its bills, Moody's said.
Quinn's three-year financial forecast released in January warned that if income tax rates decline and no offsetting actions are implemented, the backlog of unpaid bills would almost triple to $16.2 billion in the next three years, Moody's noted.
Any increase also stands to impact other governments that rely on state aid. The state expects to close fiscal 2014 at the end of June with a roughly $5 billion backlog, down from a peak of $9.9 billion in 2010. Quinn had proposed reducing the backlog to $2.2 billion in a five-year fiscal plan released with his recommended budget. That five-year plan relied on making permanent the existing tax rates.
"Renewed growth in the backlog could put financial pressure on rated entities, such as public universities, awaiting payment from the state," Moody's wrote. The rating agency has hit the state's public universities with a series of downgrades due in large part to state risks.
Lawmakers are expected to wait until Jan. 1, during a lame-duck session, to revisit the tax issue. Before then a three-fifths super majority would be required for legislation that could not even command a majority.
The vote requirement reverts to a simple majority on Jan. 1. The 2011 hike was approved during a lame-duck session early in the year, after elections but before the new legislature took office.
On Jan. 1, the personal income rate will fall to 3.75% from 5%. It was raised to 5 % from 3% in 2011. The corporate rate will fall to 5.25% from 7%. It was originally at 4.8%. The higher rates have generated $26 billion in additional tax revenue that has helped cover pension contribution requirements and reduced the state's bill backlog that impacts vendors, municipalities, public universities and other entities, Moody's noted.
Illinois is rated A-minus by Fitch Ratings and Standard & Poor's. Fitch assigns a negative outlook and Standard & Poor's a "developing" outlook.
