Illinois Gov. J.B. Pritzker’s decision to shelve a re-amortization of the state’s pension funding schedule eases near-term pressure on the state’s battered ratings, analysts said.
The re-amortization would have trimmed $1 billion off the state's fiscal 2020 contribution to its pension systems.
The administration dropped the plan Tuesday, citing an April windfall in which the state collected more than $1 billion in income tax revenue than previously projected, pushing overall revenue from all taxes and sources up $1.5 billion over previous projections. That prompted revisions to the revenue forecast for both this year and for the fiscal year beginning July 1.
“When the proposal was announced we flagged it as a concern because it delays funding that is already inadequate," which would only add to Illinois' structural imbalances, said Fitch Ratings analyst Eric Kim. Fitch rates Illinois two notches above junk at BBB and assigns a negative outlook. “It’s helpful to not have it in the budget this year and alleviates a short-term concern” Fitch had over the state’s finances.
Fitch is waiting to see the outcome of the legislative session before saying more on the state’s potential rating direction.
“Assuming this represents a final decision, at least for fiscal 2020, we would view that as a positive development all else being equal,” said Ted Hampton, lead Illinois analyst at Moody’s Investors Service. “We view any efforts to reduce near-term pension contributions to achieve budget relief as a negative for the state’s credit. Where you have such a large unfunded liability the preference is to put more money in sooner. The re-amortization proposal does the opposite.”
Dropping it “could help support the state’s credit profile at its current rating and outlook” but Hampton cautioned that the rating agency’s final assessment will depend on the outcome of the legislative session.
Moody’s rates the state one notch above junk at Baa3 with a stable outlook. S&P Global Ratings rates Illinois one level above junk at BBB-minus with a stable outlook. They are the lowest ratings of any U.S. state.
While the administration had portrayed the proposal to push off the current funding schedule by seven years to 2052 as just one piece of a package that it argued would eventually bolster funding, rating agency analysts had taken a dim view.
That’s due to the near-term negative impact on a system just 40% funded with a $133.7 billion unfunded tab. Contributions under the current schedule already fall far short of an actuarially based level.
The administration left the door open to resurrecting re-amortization in the future.
Pritzker had defended the plan as needed to balance the cost of rising contributions with spending demands on education and health, human services, and public safety as part of a package that included pension bonds, future asset transfers, and a modest boost in funding should a voters approve a progressive income tax system next year.
The proposal was facing pushback from lawmakers so dropping it allows Pritzker to direct his political capital to other key pieces of his agenda. That includes passage of a $39 billion general fund, the constitutional amendment to allow the graduated income tax, and other pending pension and tax measures.
The April windfall and a review of the fiscal year prompted a revised revenue forecast for this year upward by $1.25 billion and in the next fiscal year by $800 million. The improved picture will allow the state to nearly wipe out a current-year gap.
The administration cautioned that some of those factors can’t be counted on going forward like stock market performance and taxpayers’ adjustments in their withholdings because of the new federal tax law.
Fitch’s Kim said the jury is still out on the sustainability of the revenue growth. The robust April numbers are a plus because of the cash-in-hand it provides, but “the sustainability of the revenue numbers is the real question” especially given some of the strength lay in areas like more volatile non-wage collections that include dividends and capital gains, Kim said. “We just don’t know yet.”
