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Fitch warns another Illinois stalemate could trigger rating downgrade

Friday, Feb 16, 2018

* Fitch Ratings’ bullet points on the governor’s budget proposal and the Statehouse situation…

–Budget proposal in current form is unlikely to garner legislative support;

–Pension cost shifting would pressure Chicago School District budgets;

–Continued political stalemate over time could trigger a rating downgrade.

Illinois is at BBB right now. The next notch below is BBB- and then after that we’re in junk territory.

* A few highlights from the report with emphasis added by me…

Governor Rauner’s fiscal year 2019 budget proposal for Illinois - which utilizes measures including a pension cost shift to school districts and changes to state employee health insurance to generate a modest surplus - is likely to face significant legislative opposition and Illinois will remain challenged in achieving fiscal balance, Fitch Ratings says. A re-emergence of political stalemate that negatively affects fiscal operations, including a material increase in accounts payable, could trigger a downgrade. […]

By the end of fiscal year 2019, the governor’s budget office estimates unpaid bills will be $7.4 billion, slightly higher than the $7.1 billion average between December 2010 and June 2015, but more than double what the administration considers a long-term target of 30 days. This is down considerably from a peak of $16.2 billion in October 2017, reflecting a $6 billion November 2017 bond sale, receipt of significant federal Medicaid matching funds following the enactment of a state budget after a two-year delay, and interfund borrowing. But the still extraordinary overhang of budgetary liabilities, nearly nine years into the national economic expansion, reflects the depth of fiscal and policymaking challenges Illinois faces.

Material progress in reducing accounts payable appears unlikely over the next several years, absent unexpectedly robust economic and revenue growth. The governor’s budget includes the first year of a proposed four year plan to shift pension costs to school districts and public colleges and universities, with $1.4 billion in annual budgetary savings estimated upon full implementation in fiscal year 2022. The administration anticipates dedicating these savings, along with future operating surpluses, to reducing accounts payable over time. At that rate, it could still be many years before accounts payable approaches a level the state considers normal.

Much of the rest of the report talks about the unlikelihood that the GA is going to approve many of the governor’s ideas.

* S&P’s post-budget address report is entitled “Illinois Embarks On A Fiscal High-Wire Act In New Budget Proposal”

For the governor’s planned surplus to materialize, agreement from the legislature on several major policy changes is necessary. Considering that the strategy hinges on transferring to other stakeholders a significant portion of the funding burden related to large long-term liabilities, we believe it could encounter resistance, and thus entails political risk. At its current rating level, which reflects Illinois’ weakened fiscal position, we believe the state has minimal capacity to withstand another protracted budget negotiation standoff. […]

Accounts payable and unpaid bills, projected by GOMB to total $7.7 billion at the end of fiscal 2018, would decline only incrementally, to $7.3 billion to $7.4 billion by the end of fiscal 2019. The state’s large backlog of unpaid bills, distressed pension systems, and strained fiscal operations at a time of economic growth and declining Medicaid enrollments are cautionary harbingers of the potential for renewed downward pressure if economic conditions were to weaken. In view of its recently increased tax rates, high fixed costs, and the ongoing absence of a budget reserve, we view Illinois as having diminished fiscal flexibility, undermining its resilience to unanticipated stressors.

- Posted by Rich Miller        

12 Comments
  1. - 360 Degree TurnAround - Friday, Feb 16, 18 @ 1:48 pm:

    A new nick name “Governor High Wire”

    Govneror Downgrade


  2. - Anon - Friday, Feb 16, 18 @ 1:50 pm:

    Keep in mind BBB- is where Moody’s and S&P have the state. Fitch is alone in rating the state higher than one notch above junk.


  3. - 360 Degree TurnAround - Friday, Feb 16, 18 @ 1:52 pm:

    Governor “Notch above junk”


  4. - City Zen - Friday, Feb 16, 18 @ 1:52 pm:

    Fitch’s Valentine’s Day card to Illinois:

    “Let’s BBB friends”


  5. - Nick Name - Friday, Feb 16, 18 @ 2:06 pm:

    Gov. Gaslight thanks Fitch for the advice.


  6. - Oswego Willy - Friday, Feb 16, 18 @ 2:14 pm:

    Governors own downgrades.

    Ask Mike Schrimpf and Candidate Rauner.

    That’s how it works. Same as it ever was.


  7. - Anonymous - Friday, Feb 16, 18 @ 2:16 pm:

    Writing on the wall for the ILGOP to work toward a budget with Dems.

    With the election in Nov., they’re gonna be in real trouble if they sit in the lifeboat bailing out Rauner.


  8. - Blue Bayou - Friday, Feb 16, 18 @ 2:17 pm:

    Me at 2:16, dang it. Sorry folks.

    I blame Madigan.


  9. - Ron - Friday, Feb 16, 18 @ 2:32 pm:

    Illinois is a junk state. Thanks to decades of mismanagement.


  10. - Lucky Pierre - Friday, Feb 16, 18 @ 3:01 pm:

    The ratings agencies don’t expect robust economic growth leading to increased tax receipts because the Democrats who are truly in charge of legislation will not do anything to improve the business climate in Illinois.

    The middle class includes not just organized labor and trial lawyers.


  11. - don the legend - Friday, Feb 16, 18 @ 4:26 pm:

    To Lucky. How can the destruction of organized labor, higher education and social services possibly be considered “anything to improve the business climate in Illinois.”


  12. - Barrington - Friday, Feb 16, 18 @ 4:56 pm:

    Not sure who first used “Governor Junk,” but I can’t seem to get it out of my mind.


Sorry, comments for this post are now closed.


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