To subscribe to Capitol Fax, click here. S&P keeps Illinois one notch above junk status… for now Tuesday, Jun 5, 2018 * No downgrade by S&P, but no real praise, either… Timely enactment of a fiscal 2019 budget in Illinois is consistent with the stable outlook S&P Global Ratings currently maintains on the state’s credit rating. At ‘BBB-’, however, the general obligation rating incorporates our view of the state’s longer-term vulnerabilities and remains the lowest possible rating within the investment grade categories. Among the state’s leading credits risks are its fiscal structure, which in our view, remains out of balance, a still-elevated unpaid bill backlog, absence of a 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. […] Timely passage of a fiscal 2019 budget in Illinois underscores the near-term stability of the state’s credit outlook that emerged in July 2017. Our stable outlook reflected that following its 2017 tax increases, Illinois approached fiscal 2019 with a significantly smaller fiscal gap and much diminished liquidity-related concerns. The benefits from the tax hike are mentioned several times in the full report. * Past-due bills are still a problem… Crucially, proceeds from the state’s November 2017 bond issuance enabled the comptroller to pay delinquent Medicaid bills and, in the process, ameliorate the threat of federal court intervention over the state’s cash management. Apart from the bonding strategy, however, which in our view amounts to financing state operations with long-term debt, policymakers have made little headway against the bill backlog. Additional progress would almost certainly require the politically unpalatable combination of lower spending and more revenue (higher taxes). Even after the backlog borrowing, which leveraged federal Medicaid matching funds, the comptroller reports a current backlog balance of $7.1 billion at the end of fiscal 2018. 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. Eventually, those bills will have to be paid. * The budget holes… The budget identifies $38.5 billion in general funds resources to support a like amount of corresponding expenditures, ending with a negligible $15 million balance. In our view, however, the 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 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. Furthermore, it’s possible, in our view, that strong tax receipt trends, $200 million above the prior forecast in fiscal 2018 and $160 million in 2019, partly reflect a nonrecurring windfall generated by taxpayers accelerating income into 2017 in response to provisions of the federal Tax Cuts and Jobs Act. Assuming this begins to dissipate in 2019 and beyond, the state’s fiscal condition is susceptible to erosion. 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. * And not good news for the longer term… On its present trajectory, the margin by which the state’s fiscal capacity will fall short of accommodating the scheduled increases in payment obligations will continue to widen. State fixed costs—including debt service, pension contributions, and outlays for employee health benefits (e.g., OPEB)—already consume 31% of general fund expenditures, more than twice the median for states. As a share of expenditures funded by state resources (excluding federal aid), Illinois’ fixed cost burden is even higher, at 34% of general funds outlays. Based on projections from the Commission on Government Forecasting and Accountability, we estimate that by fiscal 2025, pension contributions from the state’s general funds will increase by $1.7 billion, or 24%.. - Posted by Rich Miller

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