CHICAGO - After meeting with legislative leaders Friday, Illinois' rookie GOP governor voiced optimism that an impasse over the fiscal 2016 budget will be bridged, though no deal was expected before Sunday's scheduled adjournment.
It was unclear Friday whether any real headway had been made, amid conflicting comments coming from legislative leaders and Gov. Bruce Rauner.
After spending the last week of the legislature's regular session digging in their heels, Rauner and his Republican legislative allies met with the legislature's Democratic leaders Friday with some leaders saying Democrats were willing to negotiate on measures in Rauner's turnaround agenda.
State Senate President John Cullerton, D-Chicago restated his commitment to work with the governor on reforms, said spokeswoman Rikeesha Phelon.
"Many of the governor's ideas were given a fair hearing in the Senate," Phelon said. "Even though those bills failed, that doesn't mean that we can't continue to work on a turnaround agenda that works for middle class families."
A spokesman for House Speaker Michael Madigan, D-Chicago was dismissive of Rauner's agenda, saying his proposals were considered and had failed. They include civil judgment caps, local government property tax freezes, and worker's compensation reforms.
Rauner has tied his support for new taxes or revenue to help offset the deep cuts he's proposed to eliminate a $6 billion deficit in a $32 billion budget to Democratic support for a scaled-down version of his turnaround agenda. Democrats spent the week advancing a $36.3 billion budget of their own that they acknowledge is at least $3 billion short of needed revenue.
At a news conference Friday after the meeting with leaders, Rauner said he was cautiously optimistic that a deal could eventually be reached even as he stressed he would not sign an unbalanced budget.
"We will know if they are sincere" Sunday, Rauner said. He refused to say what Democrats needed to pass in order to signal their commitment. "We've been very clear about our turnaround agenda for months."
Democrats have decried Rauner's attempts to use the budget as leverage to pass his reform proposals.
"That's baloney," Rauner responded Friday. "They are all related to the budget." Rauner reiterated his position that he's against a "major tax hike" without structural reforms.
After May 31, any legislation requires a three-fifths majority instead of a simple majority. Rauner said he would not call a special session due to the costs involved, but said negotiations would continue in hopes of calling lawmakers back when agreements are reached.
The state's A-minus level ratings, already the lowest among states, hang in the balance with analysts looking for a structural budget fix that doesn't raise Illinois' $5 billion unpaid bill backlog or rely on one-shot patches.
Fitch Ratings and Moody's Investors Service assign a negative outlook and Standard & Poor's put the state's general obligation rating on negative watch after the Illinois Supreme Court's May 8 ruling nixing the state's 2013 pension reforms.
"I could see a rating agency making the assessment that the lack of progress on the state's fiscal and pension issues negatively affects its credit quality," said Michael Johnson, managing partner and head of research at Gurtin Fixed Income Management LLC.
"At this point, it is very difficult to discern a path forward. It is difficult to see how the state gets to a truly balanced budget and even if the current political impasse is resolved, and then they still have the pension issue," he said.
Market reaction to a single notch downgrade might be limited while a multi-notch one "would have a material effect," Johnson said. "We expected the governor's first budget process would be a series of political challenges and battles. The overarching problem here is that you have a state under tremendous fiscal stress and massive pension issues."
Standard & Poor's warned when it put the state on negative watch that the budget would figure heavily in its next action.
"Absent a credible budget for fiscal 2016 that has structural alignment of revenues and expenditures, we would lower our rating on Illinois to the 'BBB' category," the S&P report said. "The magnitude of any downgrade will be based on the 2016 budget condition and our assessment of liquidity and payables."
The state does not have any near-term borrowing planned but its spreads in the secondary market increased after the court's pension ruling. Its 10-year hit 150 basis points over the Municipal Market Data top-rated benchmark, up from a 12-month average of 144 basis points, according to MMD.
The spreads on five-year and 15 year maturities rose to 175 basis points and 190 basis points, respectively, in the aftermath of Chicago's May 12 downgrade to junk by Moody's Investors Service which had a widespread impact on some other credits.
Tensions built over the week between Democrats and Republicans. The Senate late in the week held hearings and soundly rejected several of Rauner's reform proposals.
That prompted a new round of heated statements from Rauner and GOP leaders and the Democratic majority blaming the other for the budget impasse. Republicans called the Democratic budget phony and accused Democrats of bowing to special interests.
"Speaker Madigan and the politicians he controls are walking away from the negotiating table and refusing to compromise on critical reforms needed .instead, they appear ready to end the regular session with yet another broken budget or massive tax hike and no structural reforms," the Rauner administration said.
The delay in solving the state's budget woes threatened to derail at least temporarily Chicago's efforts to win some form of relief from a $550 million spike in its public safety pension contributions next year and to win approval for an expansion of gambling that would give Chicago a casino. One idea promoted would allow Chicago to capture all revenue for seven years from its proposed casino.
The city would use funds to cover higher pension contributions aimed at reducing a $20 billion obligation that has dragged its credit rating from Moody's down to junk. Supporters estimate new casinos would generate about $500 million in new revenue for the city, state and other governments.
Cook County is also pressing for approval of its own pension overhaul. Other local governments who also face higher public safety contributions have been hoping for reforms and relief also from the 2010 state law that requires them to bring their police and fire funds up to a 90% funded ratio by 2040.