CHICAGO - Moody's Investors Service expressed doubt that retirement benefit savings pitched by Illinois Gov. Bruce Rauner can be achieved in time to balance his proposed 2016 budget.
Moody's issued a special commentary Tuesday on the $32 billion budget the rookie Republican governor proposed Feb. 18 for the fiscal year beginning July 1, which assumes the state will achieve $2.2 billion in savings through reforms to employee benefits.
Rauner's administration believes the proposals can withstand an expected legal challenge since they differ from the 2013 reforms now before the Illinois Supreme Court. The prior reforms covered retiree benefits and current employees' accrued benefits while the proposed changes would protect benefits accrued before the start of the new fiscal year.
Rauner's administration also wants to trim healthcare costs by $700 million but the budget doesn't outline how the state would achieve those savings.
"The ability to realize these savings is doubtful, however, given the hurdles to enactment and legal challenges to the new reforms that would almost certainly delay their implementation," Moody's analysts said. "Moreover, generating large pension savings without affecting accrued benefits may prove challenging."
The Rauner administration wants to put to voters a referendum clarifying that the state's constitutional public pension protection clause that would allow for changes to future benefits and healthcare insurance which unions currently argue are all protected against impairment.
"It remains unclear whether such a referendum could be executed in time for the July 1 start of the coming fiscal year," Moody's wrote.
The savings are part of Rauner's plan to trim what his administration believes is a $6.6 billion to $6.7 billion deficit without tax increases.
Moody's noted that a budget must clear the General Assembly, where Democrats hold veto-proof majorities and have pushed for new revenue to offset cuts.
The proposed budget's heavy reliance on spending restraint "given political and legal challenges, will prove hard to implement in Illinois," Moody's said.
"This political landscape may make it difficult to enact even a few key elements of the governor's proposal, much less the entire plan to achieve balance without raising revenues," Moody's analysts wrote. Rauner left the door open to tax hikes but only after various reforms are adopted to government spending and various programs.
Moody's rates Illinois A3 rating with a negative outlook.
If enacted, the cuts would shift fiscal pressure from the state to local units of government, public universities, healthcare providers and other entities that rely on state funding.
Rauner's proposed $400 million cut to higher education would prove "challenging" for the state's four-year public universities to absorb, Moody's said.
The higher education reduction represents about 18% of aid from state sources. "If cuts are implemented as proposed, universities would most likely have to raise tuition and make program reductions," Moody's wrote. "At the same time, the universities have built up liquidity in the past five years, allowing time to adjust."
Regional universities would face a tougher time absorbing the cuts because of high dependence on state funding, which ranges from 40% to 50% of operating revenue. The flagship University of Illinois enjoys greater revenue diversity.
Rauner wants to slash the amount of income taxes distributed to local governments in half, by about $600 million. The impact would vary widely, Moody's said. Among its rated cities in Illinois, income tax receipts accounted for a median 10% percent of operating revenues in fiscal 2013. Home-rule cities have broader revenue-raising flexibility while some non-home-rule municipalities are subject to tax caps under the Illinois Property Tax Extension Law Limit.
Rauner's administration responded to Moody's comment, saying: "Turning around Illinois starts with getting the state's fiscal house in order. Governor Rauner has laid out his plan and is eager to work with all members of the General Assembly to ensure the next generation can look forward to the future, instead of cleaning up the messes of the past. "
