Pritzker's Budget Increases Risk Of Junk Status: Ratings Agencies

SPRINGFIELD, IL — Ratings agencies have warned Gov. JB Pritkzer's first budget proposal, a plan to balance a structural deficit with revenue from presently illegal industries and a reduction in required pension contributions, could further weaken the state's credit.

Pritkzer said Wednesday his plan offered a "bridge to a stable fiscal future," which he said was possible only if voters approve an amendment to the Illinois Constitution to transform the 4.95 percent flat state income tax to an unspecified graduated rate structure.

Illinois' credit rating is currently judged one level above "junk" status, also known as "non-investment grade," by two of the three major ratings agencies — Moody's Investment Services and S&P Global Ratings — and two notches above with a "negative outlook" by Fitch Ratings.

In response to Pritzker's proposed budget for fiscal year 2020, two of the agencies issued statements critical of the proposal. The other said it would withhold judgement pending approval by lawmakers but suggested it would frown upon some elements of the governor's pension plans.

The state already pays more than any other to borrow money, with a premium of more than 1.8 percent over the interest rates paid by top-rated states, according to Bloomberg and Municipal Market Data.

Prior to the implementation of what Pritzker calls a "fair tax," the governor's proposed $39 billion budget closes an estimated $3.2 billion deficit with the help of $1.1 billion in new revenue.

One third of that new revenue comes from one-time, non-recurring sources like initial licensing fees for the legalization of recreational marijuana, sports betting and a delinquent tax amnesty plan, according to Fitch Ratings.

In a statement entitled "Illinois Governor's Budget Plan Would Make Insufficient Progress," Fitch said Pritzker's plan "would not materially address the state's structural budget issues in the current fiscal year or the next."

The agency said it has indicated in the past it would lower the state's rating if it "returned to a pattern of deferring payments for near-term budget balancing," and some elements of the governor's proposal "appear to do that without a clear path toward long-term balance."

Pritzker's pension plan relies on restructuring the debt by delaying the target date for the system to be fully funded by seven years to 2052, thus reducing this year's required pension payment by $800 million. It borrows $2 billion in pension funding bonds and dedicates to pensions an additional $200 million in annual tax revenue, which would be generated by his hypothetical progressive state income tax that may appear on the November 2020 ballot.

In a statement, a spokesperson for governor's office said the "ultimate goal" is the implementation of a progressive income tax, which will "transform state finances, including pensions," according to Capital News Illinois. “No element of our comprehensive pension approach can be viewed in isolation, and we expect the markets will look favorably upon infusing cash and assets into the system and dedicating more revenue from the fair income tax over and above scheduled payments.”

Any amendment would need to be approved by super-majorities in the House, Senate — and by voters. Fitch said "prospects for passage at both levels are uncertain."

Unlike with his proposed "fair tax," the governor has not supported an amendment to slow the growth in public-sector pensions — like adjusting the compounded 3 percent annual increase in benefit payments to bear some connection to the actual cost of living.

Elmhurst Republican Deanne Mazzochi proposed a bill earlier this month to allow voters to consider a constitutional amendment to limit pension growth, although it is unlikely the electorate will be given such a chance.

"Absent a constitutional amendment, Illinois' ability to more directly reduce already-accrued retiree benefits appears sharply limited," Fitch said.

Without a constitutional change to the pension system, "Tier 2" employees hired after 2011, especially teachers, are subsidizing all the older workers in the system, according to actuary Elizabeth Bauer.

S&P said the proposed budget does not make "meaningful progress toward tackling the state's backlog of bills or long-term structural deficit," according to a Feb. 22 report entitled "Illinois Budget Proposal Places Risky Bets On Asset Transfers And Graduated Income Tax."

"Illinois has a track record of leaving difficult fiscal choices to future budgets, and to the extent that reforms do not materialize to offset weaker pension funding, the fiscal 2020 budget could weaken the state's credit trajectory," it said.

The ratings agency said Pritkzer's proposal "precariously balances the current budget, but punts measures to address fiscal progress to future years," judging its projected balance to be "dubious."

Implementation of legal sports betting and recreational marijuana could take longer than anticipated, and revenue projections may be overly optimistic, but the report noted relying on "uncertain revenues and lingering structural imbalance is status quo" in Springfield.

"More consequential for credit quality, the proposed budget asks legislators to reduce pension contributions based on the faith that future years' budgets will address fiscal sustainability," the agency said. The report pointed out Pritzker's strategy is predicated on the passage of his progressive income tax proposal. "This revenue stream is far from certain, and there is no detail yet on rates, brackets, or the amount of revenue it is supposed to generate."

S&P said single-party control of state government presents the opportunity for a "more collaborative budget process," but Illinois' ability to make "politically difficult decisions in favor of structural balance and sustainability" is unproven.

"If it adopts the budget in its current form, it remains at risk of repeating a pattern of putting off hard choices while eroding pension funding. Illinois cannot indefinitely push out pension payments given benefit payout requirements," it said. "If the state fails to redeem its longer pension amortization schedule through a practical reduction in liabilities, its credit trajectory could slip."

Moody's lead Illinois analyst told The Bond Buyer the move to reduce pension contributions in the short term by extending the payment schedule would be viewed "as a negative," but added that the firm would be "withholding judgement to see how the legislative session plays out" and what winds up winning approval.

Related:

• Marijuana Tax, Betting Big Part Of Pritzker's $39B Budget
• Gov. JB Pritkzer 2019 Budget Proposal: Full Text, Video
• Pritzker Forms Pension Task Forces Ahead Of First Budget Proposal