New Illinois budget funnels surplus to pensions, rainy day fund

Illinois lawmakers wrapped up a condensed spring session Saturday after taking action on some of the state’s chronic fiscal sore spots by socking away $1 billion in the state's empty reserves, paying down overdue bills, and padding scheduled pension contributions.

Democratic majority leaders believe the actions raise the prospects for additional rating upgrades while GOP members counter that the state remains ill-prepared once federal relief is exhausted to manage through future economic shocks.
Action on the three bills that make up the budget package with a $46.5 billion general fund stretched into the early hours of Saturday despite the announcement of an agreement struck late Thursday by Gov. J.B. Pritzker and fellow Democrats who control supermajorities in both houses.

Nathan Woodside/Lewis & Clark Community College

The deal raised Pritzker’s proposed rainy day fund deposit to $1 billion from $879 million and funneled $1.8 billion in tax relief, up from the governor’s $1 billion, mostly through one-time measures. Lawmakers also signed off on $1 billion of borrowing to extend a pension buyout program.

“Our bill backlog is paid off. Our pension liabilities are reduced. Our rainy day fund is recovering. And we are delivering $1.8 billion of direct tax relief to the people we serve,” Pritzker said at a post-session news conference Saturday. "I expect more progress to come. We haven't solved every problem fiscally for the state of Illinois but boy oh boy are we better off.”

The added spending in the package beyond the $45.4 billion Pritzker proposed is based on stronger collections during the first quarter of the year that have raised estimates for fiscal 2022 and 2023 by another $2 billion from projections the proposed budget was based on, Pritzker's office said.

The state previously said it expected an additional $2.2 billion of revenue in fiscal 2022 and another $2 billion in fiscal 2023, which begins July 1, from previous predictions.

The non-partisan Commission on Government Forecasting and Accountability’s this month revised its own forecast putting general funds in the current year at $47 billion, up a total of $4.7 billion from the enacted budget with fiscal 2023 estimated at $46.3 billion. The figures don't include ARPA relief. The $46.5 billion 2023 budget relies on several other measures, including dipping into an environmental cleanup fund, to make up the difference.

“This is a balanced budget. It’s a responsible budget,” Rep. Greg Harris, D-Chicago, who is a lead budget negotiator, said on the House floor. “Credit rating agencies are noting it. Civic organizations are noting it.”

Moody’s Investors Service and S&P Global Ratings last June both raised the state’s ratings by one notch — the first upgrades in more than a decade — putting the ratings at Baa2 and BBB respectively. S&P in late 2021 moved its outlook to positive. Fitch Ratings left the rating at BBB-minus last year but raised the outlook to positive from negative.

“The budget agreement in Illinois suggests the state is on track to implement credit-positive measures that rebuild fiscal resilience and reduce long-term liabilities including a meaningful deposit to the rainy day fund, addressing long-standing unpaid healthcare bills and chipping away at the pension liability,” Eric Kim, Fitch’s lead Illinois analyst, said Friday.

“Continued operating performance improvement and movement towards structural balance, and maintaining a more normal fiscal decision-making process, could support a return to the state’s pre-pandemic rating or higher,” Kim said.

It’s hard to say if the budget moves the rating needle towards an upgrade based on just the outlines of the agreement announced Thursday, S&P’s lead Illinois analyst Geoffrey Buswick said Friday. “But, building reserves, funding the pension, and continuing to reduce debt do provide fiscal flexibility. Those actions are consistent with good governance.”

Any ratings boost could help trim the state's spread penalties that have continued to widen last week amid the market turmoil this year driven by inflation, expected Federal Reserve rate hikes and the Russian invasion of Ukraine.

Illinois’ one, 10, and 25-year bonds were trading last week at a 59/113/120 basis point spread to the Municipal Market Data’s AAA benchmark. That’s up from 57/96/99 spreads at the start of March and 24/63/66 at the start of the year.

Republicans who proposed their own package of $2 billion in mostly permanent tax relief slammed the Democrats for turning to one-time relief they can boast of ahead of upcoming elections without achieving structural reforms on spending. They also chided Democrats for providing little time to review the documents.

“How do you possibly begin to ask questions about something that doesn’t yet exist?” said Sen. Chapin Rose, R-Mahomet, during a late-night committee hearing.

“This time is not going to last; winter is coming and we haven't prepared in the way we need to prepare,” said Rep. Mark Batnick, R-Plainfield.

"When this one time revenue dries up the only thing you will know how to do is to go back and raise taxes yet again,” said Rep. Tom Demmer, R-Dixon.

In the end, many GOP members voted for the tax package in Senate Bill 157 but against the budget appropriations bill in House Bill 900 and the budget implementation language in House Bill 4700.

Other uses for the surplus revenues are paying down a $898 million backlog of group employee health insurance bills and making $500 million in supplemental pension contributions that is said to result in $1.8 billion of long-term savings. Another $230 million will pay off the unfunded liability in the state’s college savings program.

Some of the measures were passed and signed by Pritzker last month in Senate Bill 2803 and others were in the budget package. The state's backlog of unpaid bills, which hit a high of $16.7 billion, is now down to a few billion with bills paid in a routine cycle so Comptroller Susana Mendoza has changed the account’s name to “accounts payable.”

The $1.8 billion of tax relief will be doled out through a suspension of the state’s tax on groceries for one year at a cost of $400 million; freezing the motor fuel tax, which was slated to rise in the next fiscal year, for six months at a cost of $70 million; a sales tax holiday on some clothing and back-to-school items for 10 days in August at a cost of $50 million; and doubling the property tax rebate of up to $300 per household for one year.

The package's only permanent measure expands the earned income tax credit at a cost of $100 million annually.

The early adjournment target of April 8th allows lawmakers to return to their districts to campaign ahead of a June 28 primary election, which was pushed back because of redistricting delays. Every seat in both houses is up for election this November. Lawmakers typically don’t wrap up until closer to May 31.

Lawmakers did not fully work out how to repay a $4.5 billion unemployment insurance loan from the federal government.

Stakeholders involved in talks said last week negotiations are at an impasse so the timing of fix is uncertain. The General Assembly bought time for a fix in an amendment to Senate Bill 157 approved early Saturday by pushing off what lawmakers refer to as “speed bumps” that trigger premium hikes and benefit cuts if a fix was not in place by July 3. Lawmakers pushed off that deadline to Jan. 1.

The budget directs $1 billion to the state’s long meager and currently depleted budget stabilization fund. It also mandates an extra $45 million in annual deposits.

“We know this is an important signal to the credit rating agencies that Illinois is getting its fiscal house in order and planning for the future,” said state Comptroller Susana Mendoza, who had been pushing for automatic deposits when the backlog fell to a certain threshold.

Pensions
The $500 million of supplemental pension contributions — $300 million this year and $200 million next year — are on top of scheduled payments under a 50-year ramp to reach a 90% funded ratio by 2045. The scheduled fiscal 2023 payment totals $9.6 billion.

The pension buyout legislation extends for two years existing programs begun in 2018 to June 30, 2024. The current buyouts are funded by $1 billion in general obligation borrowing capacity, $175 million of which was tapped in the state’s last bond sale last December. Only $115 million in authority remains. House Bill 4292 passed in a bipartisan vote March 29 and Pritzker praised it.

Illinois’ system of five funds carries $139.9 billion of unfunded liabilities and is only 42.4% funded, weighing heavily on the state’s bond ratings. The buyouts had trimmed about $1 billion in the liability as of the close of fiscal 2021, according to a COGFA report.

A measure that would extend the payment ramp to reach a 90% funded ratio and another one to lower the 90% target for downstate and suburban public safety funds stalled.

Local impacts
Lawmakers did not advance legislation that would have brought all police in the Chicago’s older tier one pension benefit scheme up to a simple 3% annual increase regardless of birth date. It was forecast to add $3 billion to the city’s pension tab.

The budget raised to 6.16% from 6.06% the share of state income taxes that flow to municipalities through the Local Government Distributive Fund. The share once stood at 10% and the Illinois Municipal League has lobbied to restore past cuts.

“While there remains a long way to go before LGDF funding is fully restored, this is a step in the right direction,” Brad Cole, IML executive director, said in a statement.