CHICAGO – Illinois faces junk ratings without a solution to the state's 19-month-old budget stalemate, Senate President John Cullerton warned Monday.
Illinois' $26 billion of general obligation debt already is rated at the triple-B level by Fitch Ratings, Moody's Investors Service, and S&P Global Ratings, the lowest of any state.
Its bonds trade at a 225 basis point spread to the top-rated benchmark.
Cullerton's warning came in a speech to the Chicago City Club Monday during which the Chicago Democrat laid out the case for the 12-bill legislative package known as the "Grand Bargain" he has jointly proposed with Minority Leader Christine Radogno, R-Lemont.
If state leaders push off a resolution until the 2018 governor's race as some have suggested, "the next governor will be paying businesses four years late," Cullerton said. "By then, we'll have been downgraded to junk status and no one will lend us money. The new governor will have that hung around his or her neck."
A Senate vote looms this week as the Cullerton and his Republican counterpart work to build support among their caucuses to ensure strong bipartisan support. The package's fate in the House is unclear. Gov. Bruce Rauner has praised the efforts without explicitly endorsing them, saying he will have to decide whether the final package meets his reform demands.
The legislation received a boost from a report issued by S&P Monday before Cullerton's speech.
"We believe that legislation providing additional revenue and enhanced funding certainty could improve the state's near-term fiscal outlook relative to its trajectory otherwise," analyst Gabriel Petek wrote.
The rating agency calls the package a potential breakthrough but takes no position on specific elements and warned that some pieces, like pension reforms face a legal challenge.
A failure by the state to take action on the package or some other initiative aimed at solving the state's budget mess could cause its BBB rating, which carries a negative outlook, to decline further, Petek said, labeling the state's situation a "fiscal crisis."
The 12 bills would authorize spending through fiscal 2017, $7 billion in cash flow borrowing, raise $6.5 billion in taxes, reform pensions to reduce contributions to pay down a $126.5 billion unfunded tab, and expand gambling.
The package includes versions of some of the governance and policy initiatives demanded by Rauner, including a local government property tax freeze and workers' compensation changes.
Even with action, stabilization is the best the state can hope for because years of sustained budgetary discipline will be needed, S&P analysts wrote.
"Whether the bipartisan package of budget legislation recently unveiled in the Illinois State Senate will represent the beginning of a genuine fiscal recovery remains to be seen, but an improvement in the state's credit rating will not happen during the next two years," the report said.
S&P also took Illinois to task for the prolonged dispute, which could provide fodder for House Speaker Michael Madigan's longstanding position that Rauner should drop his demands that policy and governance measures be part of a budget solution.
The Chicago Democrat has argued that the budget should be tackled on its own. Rauner has countered that the policy changes are needed to improve the state's economy.
"In the context of a growing national economy, Illinois' fiscal crisis is, in our view, a man-made byproduct of policy ultimatums placed upon the state's budget process," Petek wrote. "We believe Illinois' distressed fiscal condition and dysfunctional budget politics now threaten to erode the state's long-term economic growth prospects."
S&P put the state's fiscal 2016 deficit at $4 billion, or 11% of expenditures, leaving the state with a $7.6 billion bill backlog as it closed the books on the year last June 30. State officials have said it's grown to $5 billion this year.
S&P said the "Grand Bargain" plan to borrow $7 billion to pay down a record $11 billion backlog is "not a best practice from a credit perspective" but could help lower interest costs on the bill backlog.
Fitch downgraded the one notch to BBB last week and said it intends to resolve the negative watch by the end of the fiscal year June 30. One more downgrade would drop bonds with the state's moral obligation pledge, which are one notch below its GOs, into junk territory.
Moody's has a negative outlook on its Baa2 rating.
SPEECH
Cullerton laid out a bleak picture for the state in the absence of action, citing the damage already done to the state's social services network and higher education system, both starved for cash with just partial appropriations approved over the last 19 months.
The harm will continue to mount, forcing organizations and some public universities to shut down, further damaging both the state's reputation and economy, he said. Schools will struggle, driving up local property taxes.
"Without a balanced budget plan, government goes on life support," Cullerton said. Pension payments and retirements checks and debt payments will continue because of continuing appropriations, as well as other vital services due to court orders.
"Meanwhile our stack of unpaid bills will grow," he said.
Cullerton said the already record $11 billion bill backlog is expected to rise to $13.5 billion by fiscal year end on June 30 would hit $24 billion on election day in November 2018 if nothing is done before then. The figures come from the administration's five-year forecast that warns of a $34 billion in 2020 and $47 billion in 2022.
Cullerton said while pieces of the fix may be deeply disfavored by some, the "Grand Bargain" lays the groundwork for a solution.
"Our proposed mix of revenue, reforms, and cuts create a true framework for a balanced budget," he said, asking the audience to lobby lawmakers to support the package. "We have a chance to end the dysfunction … we have a chance to restore stability and sanity to our finances."
The "Grand Bargain" proposal has triggered intense lobbying by special interest groups. All the bills are tied together, so they sink or swim together.
"The good has to come with the bad" for a solution, Cullerton said, adding that the most contentious discussions have been on pension reforms, tax hikes, and workers' compensation reforms.
Cullerton did not put a number on how many Republicans must vote for each bill in order to ensure Democratic support.
Democrats hold 37 seats in the Senate and Republicans hold 22; each bill will require a majority vote of 30 to pass.
The package remains subject to amendment. A Rauner-appointed task force on education funding reform issued its report last week so a shell bill in the package will now be filled out and readied for a vote, Cullerton said.
He noted that if the courts eventually overturn proposed pension reforms that would shave about $1 billion off annual state contributions it won't "wreck the Grand Bargain." The bill just needs to pass for the other pieces of the legislation to take effect.
While Rauner has sought term limits as part of a budget fix, Cullerton said a bill putting a constitutional amendment to voters will come later. The Senate recently passed term limits for chamber leaders.
