* I just got an e-mail from Moody’s with the headline “Illinois Risk of Accounts Payable Growth Caused by Unbalanced Budget is Credit Negative”…
Moody’s has issued a short comment detailing the State of Illinois’ (rated A3/negative outlook) failure to extend income tax rates sunseting on Dec. 31 will reduce revenues in the next fiscal year by an estimated $1.8 billion (4.7%), leading to a structural deficit that could cause the lowest-rated state to rely on credit negative practices. This could include increasing an already large backlog of unpaid bills to achieve balanced financial operations, reversing the progress of recent years.
Illinois has used an estimated $26 billion of increased income tax revenues since 2011 to address its pension contribution requirements and to reduce a large backlog of payments to vendors, municipalities, public universities and other entities. The $5.6 billion backlog the governor’s budget estimated for June 30, 2014, would represent a 43% drop from a $9.9 billion peak set in 2010. Renewed growth in the backlog could put financial pressure on rated entities, such as public universities, awaiting payment from the state. Maintaining pre-existing tax rates was central to a five-year plan included with the governor’s budget that showed accounts payable falling to a more manageable $2.2 billion in fiscal 2019. Such gains will become harder if the fiscal 2015 budget encourages bill payment deferrals.
If not reversed or offset in some way, the expected tax revenue losses will be more pronounced in fiscal 2016 and beyond. According to the governor’s three-year financial forecast released in January, if income tax rates decline and no offsetting actions are implemented, the backlog would almost triple to $16.2 billion in the next three years.
Moody’s declaration of “credit positive” or “credit negative” does not connote a rating or outlook change. It is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.