Buoyed by federal COVID-19 pandemic aid, Illinois’ cash position improved in fiscal 2020 while pensions and other obligations pushed the state’s net position of governmental activities deeper in the hole.
The state trimmed $1.1 billion off its general fund deficit based on generally accepted accounting principles, to negative $6.4 billion at fiscal 2020 year close.
The state’s net position of governmental activities worsened by $4.7 billion and now stands at $197.8 billion, according to the state’s
The results lay out the depth of the state’s long-term fiscal obligations that weigh down its balance sheet while also offering some glimmers of hope as the state used federal aid — primarily $3.5 billion from the CARES Act signed in March 2020 — to keep various metrics from weakening even further.
The federal aid enabled “the state to handle the extraordinary conditions that came with the COVID slowdown as well as allowing it to deter further erosion in other measures that have been threatening its long term resilience,” said Richard Ciccarone, president of Merritt Research Services.
The general fund balance gap peaked at $14.6 billion for fiscal 2017 as the state’s bills grew due to a two-year budget impasse. It began letting up the following year with the deficit shrinking to $7.8 billion for fiscal 2018 and then $7.5 billion for fiscal 2019.
On the budgetary basis, the deficit held nearly steady at $5.75 billion in fiscal 2020.
“At the onset of the pandemic, Illinois' relatively weak cash position threatened to be its undoing. Thanks mostly to federal aid and better tax receipts than expected, total governmental activities revenues shot up by $7.3 billion, the state’s biggest increase since GASB 34 statements were first adopted in 2002,” Ciccarone said.
The state ended the year with days-cash-on-hand up to 39.7 days, the highest level recorded since Merritt Research first began to track states in 1997, Ciccarone said. The state’s negative general fund balances remained the weakest of all states for the fiscal year with a negative ratio at -13.3% as a percent of revenues, Ciccarone said.
The state’s net position of governmental activities has steadily deteriorated over the years. It was $189.1 billion in 2018, $182.6 billion in fiscal 2017, and $131.6 billion in fiscal 2016.
While the cash position provides a snapshot of the state’s day-to-day fiscal condition, the net position of governmental activities provides a deeper view of the state’s assets measured against obligations.
While deeply entrenched in negative territory, the state’s net position to governmental expenses ratio showed the biggest percentage improvement in years.
“The improvement allowed Illinois to escape the basement compared to all other states,” Ciccarone said.
Illinois ended the year second only to New Jersey, which has a deeper governmental activities hole of $201.5 billion.
Among the nation’s states and the District of Columbia, only 12 ended the year in negative territory, according to a chart published by Auditor General Frank Mautino.
The
“The state continues to show an inability to generate sufficient cash from its current revenue structure to pay operating expenditures on a timely basis,” the financial results read. “The state’s two largest revenue sources, income tax and sales tax, are especially susceptible to changes in the economy.”
While the audit offered some positive features, Ciccarone cautioned that it’s only “a rose-colored veneer on a relatively delicate financial footing” as the “burst of revenues coming from the federal government are more like one-time source revenues that can’t be relied on to sustain an upturn.”
The numbers
During fiscal year 2020, the state’s net pension liability rose $4.7 billion to $143.3 billion from $138.6 billion. The state’s other post-employment benefit liability for healthcare saw a $4.5 billion hike to $59 billion from $54.5 billion.
Economic growth fell as nonessential businesses temporarily closed due to Gov. J.B. Pritzker’s mandates to mitigate the spread of COVID-19 in the final months of the fiscal year. A phased reopening began late in the fiscal year and continued through fiscal 2021.
The state’s assets increased $6 billion to $59 billion due to a mix of factors that included borrowing, cash from the state treasurer used to pay down bills, and $1.8 billion more in taxes received. The state’s liabilities increased $14.7 billion to $263.4 billion due to rising pension and OPEB burdens and other factors.
Short-term notes and general obligation certificates payable increased $1.4 billion with the issuance of $1.2 billion in short-term general obligation certificates to manage early hits to cash flow from the pandemic. The state tapped the Federal Reserve’s Municipal Liquidity Facility for the borrowing.
The state ended the fiscal year with $29.7 billion of general and special obligation bonds outstanding.
Self-insurance and Medicaid program liabilities, known as Section 25 obligations, decreased $737 million to $1.4 billion. General fund revenues rose $5.6 billion to $55.5 billion and expenses rose $5.4 billion to $53.5 billion due mainly to $3.5 billion of spending growth on health and social services programs.
Ongoing economic challenges posed by the pandemic along with “the accumulated deficit in the general fund, continued growth in the net pension liability and OPEB liability, and ratings on debt issuances of the state may impact the state’s ability to access credit markets to pay operational expenditures more timely and may increase interest costs of those borrowings,” the financial statements said.
The audit provides a deep look at just how much the state’s long-term burdens, led by its retirement obligations, weigh on its fiscal health but progress in fiscal 2021 that’s not reflected in the audit led to two rating hikes and a positive outlook from another.
Moody’s Investors Service and S&P Global Rating in recent months both
Analysts attribute the positive momentum to an infusion of $8.1 billion from the American Rescue Plan Act President Biden signed in March, rosier tax collections, and the state’s management of the pandemic’s fiscal impact.
And while Illinois remains the lowest-rated state and weaker market dynamics that don’t favor riskier credits could again drive up its borrowing costs, the state reaped the benefits of both market conditions and its own fiscal gains in its latest bond sale late last month.
The winning bid for the state’s $130 million issue of sales-tax backed Build Illinois saw the 10-year land a spread of 40 basis points to Municipal Market Data’s AAA benchmark, less than half of the 89 bp spread it saw on its last sales tax deal in 2018. The state returns with a $210 million taxable series of new money and a $160 million refunding series in mid-September.
Illinois Comptroller Susana Mendoza’s office prepares the annual financial statements and Mautino’s office provides an independent opinion of the report.
The state’s audit is chronically tardy, in this case being published more than 13 months after fiscal-year close.
“The state of Illinois’ current financial reporting process does not allow the state to prepare a complete and accurate Comprehensive Annual Financial Report in a timely manner. Reporting issues at various individual agencies caused delays in finalizing the financial statements,” the opinion says. “The lack of timely financial reporting limits effective oversight of state finances and may adversely affect the state’s bond rating.”
Pritzker’s office agreed with the opinion’s recommendations and said it would continue working with the comptroller’s office and individual agencies to address “core issues” that prevent a timely and accurate reporting of financial information, according to the opinion.
The state is in the midst of a multi-year implementation of an Enterprise Resource Planning system for financial accounting that is intended to transform Illinois’ information technology system and state officials believe it will help shrink reporting time.
The audit offered only a qualified opinion on business-type activities relating to the state's unemployment compensation trust fund which outsourced unemployment benefit claims processing to a service organization early in the pandemic. The system processing claims had material weaknesses in the design and operation of internal control and so auditors were unable to obtain sufficient evidence to offer an unqualified opinion, the auditor said.
