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S&P: Illinois’ new budget is ‘more of the same’

Illinois Watchdog.Org

Wednesday, June 6, 2018  |  Article  |  By Greg Bishop

Budget--State (8) , Governor (44)

The praise Illinois lawmakers heaped on the state's 2019 budget was lost on a top rating agency.

Despite having a full year spending plan that budgeteers and the governor say is balanced, S&P Global Ratings called the measure is “more of the same” and kept Illinois’ crediting rating is still a notch above junk status.

A day after Gov. Bruce Rauner signed the fiscal 2019 spending plan, a S&P report said the timely budget “is consistent with the stable outlook S&P Global ratings currently maintains on the state’s credit rating,” according to a news release Tuesday.

S&P gave Illinois’ bonds a BBB- rating with a stable outlook. That's one a notch above junk status.

The rating “incorporates our view of the state’s longer-term vulnerabilities and remains the lowest possible rating within the investment grade categories,” the rating agency said.

Illinois’ credit risks include the state’s fiscal structure, which S&P said remains out of balance with a still-elevated unpaid bill backlog, no budget reserve and distressed pension funding levels.

“While the emergence of a more collaborative budget process has potentially constructive credit implications, the substance of the package largely represents an extension of the status quo,” the report said.

S&P also raised concerns about fund sweeps and revenue projections.

“[T]he budget falls short of achieving structural balance, relying on $800 million in interfund borrowing and $270 million of net proceeds from the sale of the state-owned Thompson Center,” the report said. “The state is also liable for up to $400 million in previously unaccounted-for costs related to prior step increases the courts have ruled are due to state employees.”

Another assumption the ratings agency highlighted was increased tax revenue from federal tax cuts that S&P said reflects a one-time windfall.

“Assuming this begins to dissipate in 2019 and beyond, the state's fiscal condition is susceptible to erosion,” the report said. “The economy itself is also a risk. According to our forecast, which is in line with the consensus view, GDP growth will peak this year and then begin to decelerate with any such slowdown now potentially accentuated in Illinois by the effects of retaliatory tariffs placed on state exports by U.S. trading partners.”

S&P was critical of the planned savings from the pension buyout plan.

“[B]ooking these savings upfront implies they will not dent the steep upward sloping pension contribution schedule facing the state,” the report said. “This follows a familiar pattern in which lawmakers favor the immediate recognition of any potential savings related to pension policy changes while deferring those that result in higher costs.”

With all of that, the planned budget is good for local governments like municipalities and school districts “by providing both incrementally higher amounts of aid as well as improved funding certainty,” S&P said.

“The budget also halves to 5 percent from 10 percent a cut to local government distributive funds, providing them with $100 million in additional revenue,” the report said.

The S&P report said the budget leaves difficult choices on how to tackle the state’s massive bill backlog for future legislators.

“Policymakers have made little headway against the bill backlog” despite bonding out $6 billion for old bills last year, the report said.

“Additional progress would almost certainly require the politically unpalatable combination of lower spending and more revenue (higher taxes),” the report said. “This, along with the state's long-term liabilities, precariously balanced operating budget, and lack of budget reserve, continue to weigh on the state's prospects for a higher rating."