Why the regular session deadline is not critical to Illinois' bond rating

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CHICAGO – A smaller budget gap thanks to an income tax hike last year and an absence of partisan bickering has S&P Global Ratings less worried about Illinois’ budget deadlines this year.

With two of the state’s ratings one notch away from junk, there has been a lot of attention focused whether state lawmakers adopt a budget by the end of the day Thursday when their regular session officially concludes.

“We are more focused on what the substance of any budget agreement is than we are on whether it’s in place of the first day of June or the first day of July,” S&P’s lead Illinois analyst, Gabriel Petek, said during a panel discussion at a the rating agency’s credit forum in Chicago last week. Rating agencies have warned the state against actions that drive up the bill backlog or add to its pension burden.

S&P cut Illinois to its current BBB-minus level last June 1 and put it on negative credit watch, as the state careened toward a third fiscal year without a full budget. After passage of a budget with income tax hikes in July over the governor’s objections, S&P removed Illinois from negative watch and assigned a stable outlook as liquidity threats eased.

This year, the state heads into the final days of its session in a weak, but more stable shape and with an improved political tone.

“The governor has not made his support of a budget deal contingent on implementation of his so-called turnaround agenda” of policy items, Petek said. The discussions appear “a little less heated so that seems favorable.”

Key lawmakers participating in bipartisan budget working groups say the sides are close to agreement on how to cover spending with nearly $38 billion in anticipated revenue, but have released few details. Bickering has quieted as both sides weigh the impact of their words on the loomingNovember elections.

The Chicago Civic Federation echoed S&P on the importance of the substance of the eventual budget. “The best outcome for the state would be a bipartisan budget that is structurally balanced and begins to address the $129 billion unfunded pension liability, the $7 billion bill backlog and the lack of adequate reserves,” the federation wrote in a May 24 report.

Few expect the state to tackle the pension issue or come up with cash to further pay down the backlog.

The state must account for more than $1 billion in unappropriated spending from the current fiscal year. It also faces a potential bill for a few hundred million dollars to cover overdue so-called step raises that were frozen for the last few years and the governor wants lawmakers to approve $240 million for a replacement veterans’ home plagued by outbreaks of legionnaire’s disease.

After May 31, the threshold to approve legislation with an immediate effective date increases to three-fifths from a simple majority. House Democrats lack a supermajority so GOP support is needed before or after May 31 if Rauner were to veto a budget.

The new fiscal year begins July 1 so both May 31 and July 1 are key dates.

Moody’s Investors Service also stung Illinois with a June 1 downgrade last year, to its current Baa3 rating, after the 2017 session ended without action on a budget.

Fitch Ratings currently rates Illinois one notch higher than the other two agencies, at BBB, with a negative outlook.

“Another long-term budget standoff between the legislature and Governor would undoubtedly be disastrous for the state. The question of whether it can be avoided looms as the state nears a technical deadline,” the Civic Federation wrote.

A flurry of activity, from expanding higher education borrowing capacity to new casinos, is also pending with floor sessions scheduled in the coming days.

A bipartisan group of lawmakers tasked with developing legislation to aid the state’s budget-battered public higher education system unveiled a series of proposals, one of which would double the public universities’ certificates of participation debt service capacity to address deferred maintenance.

Maximum debt service for the flagship University of Illinois would double to $200 million from $100 million while the limit for Southern Illinois and Northern Illinois University would rise to $40 million from $20 million. Illinois State University's maximum debt service would rise to $40 million from $10 million. The limits of Western Illinois and Eastern Illinois would double to $20 million and the limits of Northeastern Illinois, Chicago State, and Governors State University would double to $10 million. The schools would face reporting requirements on the affordability of the borrowing and what the proceeds are funding.

“We believe that in order to fix the Illinois economy we have to do it through our higher education system,” said Chris Welch, D-Westchester, chairman of the House Higher Education Committee.

The state’s public universities have faced enrollment declines as the impasse took a toll on their reputations, balance sheets, and ratings. Only two – the University of Illinois and Illinois State – held on to investment grade ratings from Moody’s Investors Service and S&P Global Ratings.

A big expansion of gambling including construction of a Chicago casino resurfaced but it failed to clear a committee vote on Monday. The sponsor, Rep. Bob Rita, D-Blue Island, had planned to try again on Tuesday but held the bill and is deciding his next step.

The plan would establish six new casinos and authorize slot machines at Chicago’s airports and at horse racing tracks. The plan faces opposition from some existing gambling venues that are concerned the expansion would cut into their profits.

Rauner on Tuesday announced a six-year $11.05 billion road and bridge building program that includes $2.2 billion in spending in fiscal 2019. The total spending is in line with 2016 and 2017 plansbut fiscal 2019 spending is down slightly from the last two years as capital dollars become more scarce with the $31 billion capital program from 2009 winding down.

Transportation officials have warned that more spending is needed and there’s bipartisan support for it but no new revenue stream has been identified to back fresh borrowing and the issue has taken a backseat to the operating budget. The projects rely on a mix of state and federal funds with no borrowing planned.

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