The mood was upbeat earlier this month when state lawmakers wrapped up their spring session after passing a $40 billion budget and a $45 billion capital construction plan, both funded by millions of dollars in new and increased taxes and revenue streams.
Supporters of Gov. J.B. Pritzker’s agenda hailed it as a new direction toward remedying Illinois’ chronically precarious finances, the state still owes billions of dollars in unpaid bills and unfunded pension liabilities.
And in the years ahead, Illinois will lean on revenue from sources like gambling and recreational marijuana that a Wall Street ratings agency characterized as “volatile,” while also counting on voters to approve a constitutional amendment allowing a progressive income tax.
“Make a toast and then get back to work because we still have a long road ahead for our recovery,” Illinois Comptroller Susana Mendoza said in an interview this week.
The state’s backlog of unpaid bills totals more than $6 billion. Lawmakers authorized $1.2 billion in borrowing to cut into that, which aims to make inroads on eliminating the bills that generate late payment interest penalties, Mendoza said. That will mean interest rates “dramatically” lower than the 9 to 12 percent the state pays today, Mendoza said.
“And while that will leave a pretty hefty $5 billion plus bill backlog, it’s certainly a lot more manageable, and it’s a bill backlog that does not incur interest on late fees,” Mendoza said. “I think in a matter of a few years, if everything continues to move in this positive direction, we’ll be looking at a significantly smaller bill backlog.”
A snapshot of the $6.3 billion in unpaid bills held by the comptroller’s office as of May 31 shows nearly $1.8 billion fell under the category of medical bills, which is primarily Medicaid. Nearly $1.2 billion, or over 18% of bills, stemmed from the Health Insurance Reserve Fund, which funds payments for state group health insurance.
Roughly 24% of bills, or nearly $1.5 billion, was divided among the categories of pensions, elementary and secondary education, higher education, social service agencies and other state government functions. The remaining 30% of those unpaid bills represented transfers to other state funds.
Unfunded pension liabilities total $134 billion, the worst in the nation. Pritzker’s plan to reduce the state’s payment to its severely underfunded pension plans, spreading them out over a longer a period of time, was scrapped after April tax revenue far exceeded expectations.
During Illinois’ yearslong budget impasse while Republican Gov. Bruce Rauner was in office, ratings agencies cut the state’s credit rating to near junk status. In late 2017, Rauner’s administration was also borrowing money on the bond market to pay down the state bill backlog, then hovering around $16 billion.
That number is now significantly lower, and Pritzker and lawmakers from both parties have said the $40 billion state operating budget that takes effect July 1 is balanced. But Mendoza said her job is to remind everybody that it’s not time to “truly celebrate,” noting the state’s rainy day fund couldn’t support “one single minute of government operations.”
“As I like to say, we’re not out of the woods yet but we can maybe see a little light between the trees and that’s a really good place for us to be, considering where we were just a year and a half ago,” Mendoza said.
Kent Redfield, professor emeritus of political science at the University of Illinois Springfield, said that while a degree of optimism is warranted, there’s a “tremendous amount of uncertainty,” in large part because Pritzker is banking on voters approving a change to the state constitution to shift income tax collection from a flat rate to a graduated rate.
Redfield characterized the Pritzker administration’s strategy as essentially “treading water” on pensions and unpaid bills until 2021, and then “if this all comes together, we’ll be able to address those more effectively than if we focus on them right now.”
New revenue sources like those from a massive gambling expansion and legal adult-use marijuana are “essentially a bridge to get you to a graduated income tax,” Redfield said.
Moody’s Investors Service affirmed the state’s credit rating last week, calling potential revenue “underperformance” in the budget year that begins July 1 “manageable, despite the state’s heightened vulnerability to the next recession.” Moody’s last month concluded Illinois and New Jersey are the two states least prepared to confront a recession.
Among the factors that could lead to a credit rating upgrade for the state are a comprehensive plan to address pension liabilities and progress towards paying down unpaid bills that doesn’t rely on long-term borrowing, according to Moody’s.
In the past year, the state “marginally” built on its credit strengths, according to Moody’s.
“The accomplishments of the 2019 legislative session indicate improvement in political willingness,” Moody’s said in its ratings rationale. “However, pension contribution requirements remain on track to outpace organic revenue growth, which will subject the state to persistent fiscal pressure, barring further politically difficult decisions on tax increases or essential service cuts.”
Moody’s on Thursday released an analysis of how the flurry of bills lawmakers passed in the final days of the legislative session, including a massive gambling expansion and statewide infrastructure plan as well as legal recreational marijuana, are expected to affect the state’s finances.
Historically underfunded school districts, including Chicago Public Schools, “emerged as the biggest winners” from the $40 billion budget Pritzker signed into law last week, due to a $375 million increase in formula funding, according to Moody’s.
Local governments in Illinois will see a solid boost from the planned roughly $45 billion infrastructure plan and potential new revenue sources, but potential revenues from gambling and recreational marijuana are considered “volatile,” according to the Moody’s report.
The gambling expansion lawmakers approved calls for six new casinos, including establishments in Chicago, Rockford and Waukegan, and has the potential to generate a significant amount of money. That money is currently earmarked for Pritzker’s $45 billion construction program. But the revenue is challenging to estimate, “particularly as the gambling landscape is becoming increasingly competitive,” according to the Moody’s report.
Moody’s also noted that all of the cities chosen for casinos are grappling with rising pension debts, and that there is an “inherent budget risk in having a growing share of a budget comprised of volatile revenue while the share of expenditures comprised of fixed obligations grows.”
With 4,000 authorized gaming positions, the Chicago casino is poised to bring in more revenue than the other casinos lawmakers voted to authorize, but Chicago also has a significantly larger pension contribution shortfall compared with the size of its operating budget, making its revenue needs “more pronounced,” according to the Moody’s report.
If Illinois’ future revenue from recreational cannabis follows states that legalized earlier, local governments will receive minimal tax revenue from sales, according to Moody’s.
“I think they appreciate that the legislature made some significant movement in establishing legitimate not one-time but permanent revenues, future revenues,” Mendoza said of the report. “So that’s a good start. I think they want to see that materialize, I think they want to see a plan put in place to deal with the looming pension debt that we have.”
Pritzker last week signed into law a set of graduated income tax rates that would take effect only if voters approve next year a change to the Illinois Constitution to do away with the current flat-rate income tax structure.
The rates proposal taxes the top 3 percent of earners — those who draw in more than $250,000 annually — at a higher rate, which is expected to generate $3.5 billion in revenue.
“It really is two years of keeping things afloat until you get to hopefully, from Pritzker’s standpoint, a graduated income tax,” Redfield said. “If you don’t pass the graduated income tax, we’re kind of back to where we were when Rauner left office, where you’re going to have to raise the flat-rate income tax, and you’re probably not going to be able to do that at a level that will allow you to sustain the spending built into this budget, going forward.”
