CHICAGO — Illinois Gov. J.B. Pritzker put passage of a “balanced” budget and adoption of a long-sought infrastructure program with new revenue to support it atop his fiscal priorities for the General Assembly’s spring session.
Pritzker, a Democrat who unseated Republican Bruce Rauner in the November election, took office Monday.
The new governor enjoys three-fifths Democratic supermajorities in the House, which has 74 Democrats and 44 Republicans, and the Senate, which has a 40-to-19 split. Past Democratic governors, however, who enjoyed majorities have struggled.
Pritzker will pursue his agenda under scrutiny from investors and rating agency analysts.
Illinois’ ratings are the lowest among states, with two just one notch away from junk, leaving little room for missteps. The state’s secondary trading spreads have come down from their highs during the two-and-a-half year budget impasse but remain near two percentage points over the Municipal Market Data’s top benchmark.
The state’s unpaid bill backlog of $7.5 billion, a roughly $1 billion deficit in the current budget, and unfunded pension liabilities of $133.7 billion weigh heavily on its balance sheet.
“The initial response is a wave of optimism that some of the state’s fiscal issues will be solved and the fact that they have a supermajority there is an expectation that some things will get done,” said Richard Ciccarone, president of Merritt Research Services.
As lawmakers dig in, Pritzker could face pushback on taxation and spending and agreement is not assured. Former Gov. Pat Quinn won approval for only a temporary income tax increase in 2011, not the permanent one he sought, and Democrats often butted heads with former Gov. Rod Blagojevich and rejected several of his budgets. After he was arrested on corruption charges, they kicked him out of office.
“Certainly the market is looking for signals and mile markers and a balanced budget is one but I wouldn’t be satisfied as an investor with just a one-year balanced budget. The state has to make a dent in its past liabilities,” Ciccarone added. “We can’t wait too long to see significant progress in the liabilities plaguing the state because the clock is ticking and they only get more expensive. We need long-term solutions.”
Those solutions also have to keep in mind the need to stem the outflow of citizens and businesses, he added.
“There has been no appreciable change in Illinois general obligation spreads in the past few weeks,” with the state’s 10-year trading around 185 basis points more than the Municipal Market Data’s AAA benchmark, said MMD strategist Dan Berger.
Spreads have ranged from 170 bp to 185 bp in recent months as the market views the state’s rating as holding steady in the near term. “Illinois still has the highest spreads among the 50 states," Berger said.
“Thanks to an on-time budget and a revenue tailwind attributable to an uptick in economic growth, Illinois’ fiscal position has improved in fiscal 2019. However, its budget is still structurally imbalanced, its weak reserve position, coupled with rising fixed costs, leave it vulnerable to an economic slowdown in fiscal 2020, let alone a recession,” said S&P Global Ratings analyst Carol Spain.
Add on new spending proposed by Pritzker and rising pension costs amid the possibility of slowing tax growth and the state requires new revenue.
“Illinois remains vulnerable to a recession and will be challenged to balance addressing service needs while preparing for an economic slowdown,” Spain added. “To the extent Illinois’ fiscal operations remain in a structural deficit, this will continue to represent a key source of downward pressure on its credit rating.”
Pritzker acknowledged as much in published interviews, saying “we will be in a better position” to manage if the state passes a balanced budget this year.
AGENDA
Pritzker shed some light on his support for various measures and their potential timing in his Monday inaugural address and published and televised interviews in recent days.
“We will propose, debate and pass a balanced budget this year,” Pritzker said in the speech. The state, however, also will need to close a roughly $1 billion shortfall in the current $38.5 billion general fund.
The budget address is set for Feb. 20.
“Our obligations as a state outmatch our resources. Our fiscal situation right now is challenging…but be clear about this: I won’t balance the budget on the backs of the starving, the sick, and the suffering,” Pritzker said.
While he expects to squeeze out savings from government efficiencies, Pritzker’s pledges to protect social services and increase funding for child welfare and early childhood education signal the need for more revenue.
“I will work with the legislature to legalize, tax and regulate the sale of recreational cannabis in Illinois,” he said during his speech. Backers say the legalization of recreational marijuana could generate $700 million.
Pritzker also backs some form of expanded gambling, especially the sports betting allowed by the recent Supreme Court decision, but it’s not among his priorities and past expansion proposals have stalled amid heated debate.
A bill that would establish new casinos, including one being sought by Chicago, and expanded slot machines is expected to soon be introduced. Estimates vary on how much a package could generate.
Backers have put the number at more than $500 million in new annual revenue. But officials from the non-partisan Illinois Commission on Government Forecasting and Accountability warned during hearings last year of oversaturation between existing casinos and video poker and suggested more limited revenue prospects.
Longer term, Pritzker stressed the need for a graduated income tax. He launched into the need for a shift away from a flat tax, a cornerstone of his campaign, in his address but he has not offered rates or a timeline for legislative action to get the constitutional amendment on the 2020 ballot.
“The current tax system is simply unsustainable. The future of Illinois depends on the passage of a fair income tax,” he said.
The GOP is opposed.
“It’s clear that Governor Pritzker’s agenda will be the same agenda that has dragged our state down for decades — borrow, tax, spend, repeat. Over the course of the election and again today, Pritzker promised billions of dollars in new spending, programs, and regulations, all of which our state cannot afford,” Republican Party Chairman Tim Schneider said in a statement issued after the address.
While pressures may build to raise revenue especially if a recession hits, Pritzker said in multiple published interviews he has no intention of raising the current flat income tax rate.
"As far as governance goes, I think his actions are trying convey an effort to reach across the aisle, and though it doesn’t mean his agenda will get unanimous support," said John Humphrey, head of credit research at Gurtin Municipal Bond Management. "The progressive tax and pensions are the two areas that could have a meaningful impact on the direction of the state in the future one way or another, but both are also the ones that will take time to take shape, and even after they do and something is implemented, it will take more time to determine how it actually does affect the credit quality."
A capital bill local governments and transportation agencies have been clamoring for years should enjoy bipartisan support.
“I’m going to get that going as soon as possible,” he said. “I’m fairly convinced there is a majority of support for getting the revenue that’s necessary.”
The package as Pritzker envisions would be supported by no single revenue stream but a variety of sources, he said. It’s unclear whether that includes expanded gambling, sports betting, and legalized marijuana.
Transportation groups and Chicago Mayor Rahm Emanuel have lobbied for a gasoline tax hike. Pritzker did not rule his support for one out but described it as a regressive tax that he doesn’t favor.
Illinois’ $31 billion 2009 capital program has mostly run its course. It relied on a series of taxes and fees that have fallen short of estimates, requiring the state to dip into the general fund to repay general obligation borrowing to support the program.
Also in the works is a report from a transition budget working group led by deputy governor Dan Hynes, a former state comptroller. It may offer fixes for the pension woes that serve as a central drag on the state’s ratings and pressure the general fund.
The state owes $9.2 billion to the system in fiscal 2020, up by 8% from this year. At end of the ramp-up of the current 50-year payment schedule in 2045, the state will owe $19 billion annually.
Pritzker has said pensions are a promise and he is considering a re-amortization of the 1995 funding schedule with the goal of putting more cash in upfront to bring down the liability, which might come from borrowing. Fitch Ratings has warned a structure that lowers the 90% funding target could pose a credit negative.
Also expected over the next month are appointments to the Illinois State Toll Highway Authority. Lawmakers voted to cancel the terms of current members, a move sought by Pritzker and defended as needed due to ethics questions over board actions.
Pritzker also may soon seek to put his own hand-picked leaders at the helm of some state-related borrowers and remake boards as member terms expire.
The governor holds sway over the toll board, the Illinois Finance Authority, the Illinois Housing Development Authority, and the governing boards of state public universities. He also has some appointment powers over the Regional Transportation Authority, Metropolitan Pier and Exposition Authority, and Illinois Sports Facilities Authority.
Higher education, which was hard hit during the budget impasse, is asking for a 16% increase. Pritzker said in published interviews he’s committed to raising funding levels but refused to commit to a level given the state’s budget troubles.
