New bonds, taxes central to Illinois governor's budget

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CHICAGO — Illinois would borrow another $1.5 billion to pay down the state’s $8 billion unpaid bill backlog and introduce a new income tax bond credit to the market to back $2 billion of pension borrowing under Gov. J.B. Pritzker's fiscal 2020 budget proposal.

Additional borrowing slated for the current and new fiscal year includes $1.1 billion of bonding for capital and $1 billion of already approved general obligation bonds to cover the cost of a pension buyout plan now underway that was supposed to achieve $400 million in savings this year.


Pritzker, who took the reins of state government in January after beating former Gov. Bruce Rauner in November, unveiled a $77 billion all-funds spending plan for the fiscal year that begins July 1.

The administration labeled the plan balanced but whether rating agencies and government watchdogs will agree remains to be seen given its reliance on tax revenue from new sources not yet in place. The administration also acknowledges the budget is far from structurally balanced.

The finance team is labeling the plan a “bridge” budget that banks on the General Assembly approving a constitutional amendment to shift to a graduated tax from a flat tax that voters would be asked to approve in 2020 with the goal of raising more income tax revenue from the wealthy.

“This is only year one of a multi-year endeavor, and very importantly it is built on the state’s current regressive tax structure that I do not favor and that puts the greatest burden on working families,” Pritzker said in a combined budget and State of the State address Wednesday. “A fair tax system will allow us to eliminate the structural deficit that has plagued our state for nearly two decades.”

The Democrat inherited a bill backlog and budgetary red ink along with $133.7 billion of unfunded pension liabilities. The state has two bond ratings one notch away from junk and a third that is only two notches above.

Pritzker's budget proposal would make little headway on pensions or the backlog absent the proposed borrowing, but the administration is hoping rating agencies and investors will recognize the longer-term plans to get the state on a stable fiscal path.

The state’s 10-year general obligation bond trades at a 183 basis point spread to Municipal Market Data’s top benchmark and its long bonds at a 168 bp spread.

The spending blueprint includes a $38.9 billion general fund budget that anticipates a $150 million ending balance. The plan is up about 4% from the revised general fund budget this year of $37.4 billion. The state began the fiscal year with an approved $38.5 billion general fund but some revenues are no longer anticipated like the sale of the state’s downtown Chicago headquarters.

The state faces a $3.2 billion gap heading into fiscal 2020. That includes a roughly $900 million shortfall this year. The administration said Wednesday it is looking at ways to control agency costs. Much of it could land on the unpaid bill backlog.

The budget is short on cuts and big on new revenues, and about $1.1 billion is being cut from the $9.1 billion pension contribution owed in fiscal 2020. About $952 million of the total cut, with an $878 million impact on the general fund, is due to the administration's plan to re-amortize and extend by seven years the existing 50-year funding schedule, set in 1995, and $125 million is from extending a buyout program.

The administration in a budget briefing for the media was hard pressed to cite any cuts, instead saying that budget negotiations with agencies was more about saying no to some increase requests.

About $1.1 billion of new revenue is expected from a series of new taxes and other fiscal maneuvers.

New taxes Pritzker proposes include $212 million from the implementation of sports wagering, $170 million from the legalization and taxation of recreational cannabis, $20 million from a tax on plastic bags, and $94 million from the closure of a corporate tax loophole.

Another $10 million would come from a new tax on e-cigarettes, $55 million from a cigarette tax hike, and $390 million from a tax on Medicaid providers through a special assessment that could leverage federal dollars. All the three sources would go toward Medicaid.

Other fiscal tax or credit changes include a phasing out the private school scholarship to save $6 million, a new tax structure for video gambling that would generate $89 million, and capping a retailers discount to save $75 million. A proposed delinquent tax payment incentive program would generate $175 million.

Increased spending is primarily allocated to education, public safety, and social services. The budget raises kindergarten through 12th grade funding by $375 million. The Department of Human Services would see an additional $270 million.

BONDS AND CAPITAL
The state anticipates selling the first tranche of GO bonds for the pension buyout in a $300 million sale in April. The state would follow that with a $1.5 billion GO backlog borrowing in June. It already sold $6 billion of GOs in 2017 to pay down the bill backlog.

The new fiscal year would see $600 million of GO bonds for capital and the remaining $700 million of GOs for the pension buyout in August. In January, the state would return to borrow $500 million of GOs for capital.

In March 2020, the state would sell $2 billion of pension obligation bonds under the GO credit or a new Individual Income Tax structure. Legislative authority would be needed. Such a move would likely face the ire of existing GO holders who might view it as a diminishing the value of their bonds because revenue would be siphoned off to a new set of bondholders.

“IIT bonds would be limited obligations of the state, payable solely from individual income tax revenue pledged to the IIT bonds,” say budget documents that describe the bonds as being similar to the state’s Build Illinois sales tax backed bonds and modeled after New York’s personal income tax credit established in 2001.

“IIT bonds should provide the state with a higher rated credit and a lower cost of capital, than its general obligation bonds,” budget documents say. “IIT bonds may also diversify the state’s investor base, fostering more investor demand for the state’s bond sales.”

Just how much savings could be achieved is unclear given that Fitch Ratings and S&P Global Ratings both hit the Build Illinois bonds with downgrades because both now more closely link such credits to the state’s general credit profile. Moody’s Investors has long held the two credits at the same level.

The administration did not offer additional details on the new structure or maturities on the new backlog bonding. The administration also stressed its position that “smoothing out and extending” of the pension payment ramp as part of a five-piece pension plan is “good financial management.”

The other pieces include potential asset transfers, an extended buyout, and putting $200 million annually from a graduated tax into the pension fund.

The capital budget authorizes $3.7 billion in new spending as part of an overall $17.7 billion new and reauthorized spending. A much larger, multi-year program with new revenue is expected to be crafted by lawmakers during the current session.

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State budgets Public pensions Pension obligation bond J. B. Pritzker State of Illinois Illinois
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