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S&P keeps Illinois one notch above junk status… for now

Tuesday, Jun 5, 2018

* No downgrade by S&P, but no real praise, either…

Timely enactment of a fiscal 2019 budget in Illinois is consistent with the stable outlook S&P Global Ratings currently maintains on the state’s credit rating. At ‘BBB-’, however, the general obligation rating incorporates our view of the state’s longer-term vulnerabilities and remains the lowest possible rating within the investment grade categories. Among the state’s leading credits risks are its fiscal structure, which in our view, remains out of balance, a still-elevated unpaid bill backlog, absence of a budget reserve, and distressed pension funding levels. While the emergence of a more collaborative budget process has potentially constructive credit implications, the substance of the package largely represents an extension of the status quo. […]

Timely passage of a fiscal 2019 budget in Illinois underscores the near-term stability of the state’s credit outlook that emerged in July 2017. Our stable outlook reflected that following its 2017 tax increases, Illinois approached fiscal 2019 with a significantly smaller fiscal gap and much diminished liquidity-related concerns.

The benefits from the tax hike are mentioned several times in the full report.

* Past-due bills are still a problem…

Crucially, proceeds from the state’s November 2017 bond issuance enabled the comptroller to pay delinquent Medicaid bills and, in the process, ameliorate the threat of federal court intervention over the state’s cash management. Apart from the bonding strategy, however, which in our view amounts to financing state operations with long-term debt, policymakers have made little headway against the bill backlog. Additional progress would almost certainly require the politically unpalatable combination of lower spending and more revenue (higher taxes). Even after the backlog borrowing, which leveraged federal Medicaid matching funds, the comptroller reports a current backlog balance of $7.1 billion at the end of fiscal 2018. This, along with the state’s long-term liabilities, precariously balanced operating budget, and lack of budget reserve, continue to weigh on the state’s prospects for a higher rating.

Eventually, those bills will have to be paid.

* The budget holes…

The budget identifies $38.5 billion in general funds resources to support a like amount of corresponding expenditures, ending with a negligible $15 million balance. In our view, however, the budget falls short of achieving structural balance, relying on $800 million in interfund borrowing and $270 million of net proceeds from the sale of the state-owned Thompson Center. The state is also liable for up to $400 million in previously unaccounted-for costs related to prior step increases the courts have ruled are due to state employees. Furthermore, it’s possible, in our view, that strong tax receipt trends, $200 million above the prior forecast in fiscal 2018 and $160 million in 2019, partly reflect a nonrecurring windfall generated by taxpayers accelerating income into 2017 in response to provisions of the federal Tax Cuts and Jobs Act. Assuming this begins to dissipate in 2019 and beyond, the state’s fiscal condition is susceptible to erosion. The economy itself is also a risk. According to our forecast, which is in line with the consensus view, GDP growth will peak this year and then begin to decelerate with any such slowdown now potentially accentuated in Illinois by the effects of retaliatory tariffs placed on state exports by U.S. trading partners.

* And not good news for the longer term…

On its present trajectory, the margin by which the state’s fiscal capacity will fall short of accommodating the scheduled increases in payment obligations will continue to widen. State fixed costs—including debt service, pension contributions, and outlays for employee health benefits (e.g., OPEB)—already consume 31% of general fund expenditures, more than twice the median for states. As a share of expenditures funded by state resources (excluding federal aid), Illinois’ fixed cost burden is even higher, at 34% of general funds outlays. Based on projections from the Commission on Government Forecasting and Accountability, we estimate that by fiscal 2025, pension contributions from the state’s general funds will increase by $1.7 billion, or 24%..

- Posted by Rich Miller        

29 Comments
  1. - VanillaMan - Tuesday, Jun 5, 18 @ 11:23 am:

    Our bond rating won’t improve until we get a governor unwilling to stiff liabilities and pay our bills.


  2. - Maximus - Tuesday, Jun 5, 18 @ 11:25 am:

    Illinois was able to meet the status quo of past years in a timely fashion for 2018. S&P agrees and keeps the credit rating at the same level it had in the past. Unfortunately we have to wait for junk status before any real changes can be made. Status quo will be maintained until it no longer can be maintained. Didn’t we just have a tax hike that was supposed to get the finances stable and give the state a positive financial outlook?


  3. - a drop in - Tuesday, Jun 5, 18 @ 11:29 am:

    “Didn’t we just have a tax hike that was supposed to get the finances stable and give the state a positive financial outlook?”

    No, that tax adjustment back to where it was just stopped the bleeding.


  4. - wordslinger - Tuesday, Jun 5, 18 @ 11:32 am:

    I challenge S&P, Moodys, Fitch, et. al. to train their insufferable gasbags on one simple question:

    What is the percentage chance that Illinois would ever be late one day on a GO debt payment in the next five years? Next 10 years?

    I submit, the answer is “zero.”

    Tell me I’m wrong, by the numbers, the facts and the history.

    Ted Hampton, show us that big brain your parents bought you at the Columbia bookstore. How in the world is Illinois rated near junk when you know that there’s no chance the state would ever default?

    Do you seriously believe that any corporate debt on Planet Earth is more creditworthy than Illinois GO debt? If so, explain.


  5. - California Guy - Tuesday, Jun 5, 18 @ 11:34 am:

    @ Maximus

    I doubt any significant changes will be made, even if IL is hit with junk status. The only significant changes will probably happen under some kind of Federally-guided restructuring of debt (which is subject to legal debate) or tax hikes (which have proved to be immensely unpopular). The Federal option is a long shot and more tax increases will likely lead to a further erosion of Illinois’ population, thus “washing out” revenue increases long term.

    Illinois’ best bet is to legislate for a more effective, growing economy. Illinois has generally been pretty receptive to companies like AirBNB, Uber, Lyft, etc. By receptive, I mean less agressive relative to other states like New York and California.

    In the end, I don’t think IL will get it right. The pension liability is just too huge. The pension promises were just too unrealistic and were given by legislators that had the luxury of not being around in the decades to come where payments would need to be made. What’s scary as that Illinois is in this position during a period of economic growth nationally. A recession is practically guaranteed and I don’t think Illinois is well suited to weather out another few of them.

    Solution: move.


  6. - Rabid - Tuesday, Jun 5, 18 @ 11:34 am:

    Bruce Rauner failed, Rauners plan to turnaround illionis with bankruptcy was foiled by madigan


  7. - VanillaMan - Tuesday, Jun 5, 18 @ 11:38 am:

    It’s not about not paying, it is about watching a governor deliberately stiff anyone working with the state who didn’t cut a sweetheart Rauner deal, or protected by a judge.

    That bond rating reflects upon an administration S&P has no faith in.

    It will take years and years of good governing to undo a single Rauner term in office. Rauner raised our taxes until 2028, at least.


  8. - Nanker Phelge - Tuesday, Jun 5, 18 @ 11:40 am:

    What I said last week: this budget is more of the same. S&P recognizes that. The General Assembly is slapping itself on the back for doing what it is supposed to do: pass a budget. I know, given the context, it is quite an accomplishment, but it is time for the General Assembly to roll up its sleeve and do some heavy lifting.


  9. - 47th Ward - Tuesday, Jun 5, 18 @ 11:41 am:

    ===The economy itself is also a risk. According to our forecast, which is in line with the consensus view, GDP growth will peak this year and then begin to decelerate with any such slowdown now potentially accentuated in Illinois by the effects of retaliatory tariffs placed on state exports by U.S. trading partners.===

    So much winning.


  10. - Occam - Tuesday, Jun 5, 18 @ 11:45 am:

    ==Solution: move.==

    The concept of First Mover Advantage should be applied here. If you wait too long, the window will close and you won’t be able to even give your house away.


  11. - Texas Red - Tuesday, Jun 5, 18 @ 11:49 am:

    One should be precise when discussing data from any of the Nationally recognized statistical rating organizations. The BBB- rating does not indicate a inability to pay current coupon as some comments mentioned rather it indicates this ..
    “An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.”

    In an adverse economic condition the IL bondholders will be in a much riskier investment than those from any of the other 49 states. On a relative basis we are the bottom of the barrel. Some folks accept that risk looking for fatter coupon, while others with eschew IL GO bonds due to the risk.


  12. - Rich Miller - Tuesday, Jun 5, 18 @ 11:52 am:

    === If you wait too long, the window will close and you won’t be able to even give your house away. ===

    Yes, all will be a vast wasteland.

    Drama queens abound.


  13. - Demoralized - Tuesday, Jun 5, 18 @ 11:54 am:

    ==eschew IL GO bonds due to the risk==

    Then they are losing out on easy money. As long as Illinois keeps collecting taxes bondholders will be paid.


  14. - California Guy - Tuesday, Jun 5, 18 @ 12:00 pm:

    @ Occam

    Yeah you’d need to sell while things are good. Worst case scenario would be another recession and the GA/Gov passing another tax hike to shore up pension payments or increasing the local burden for pension payments (thus, pressuring local govs to increase property tax).

    I think now/near future would actually be a good time to head out. I say that sadly because I love Chicago…. it’s just too bad it has to be in Illinois.


  15. - Grandson of Man - Tuesday, Jun 5, 18 @ 12:01 pm:

    We need candidates for office who will run ads to address our gaping fiscal problems—not clownish and irrelevant Blago commercials. I wish Pritzker would start formulating and airing his plans to help us. He owes it to us, and his failure to do so would be much more troubling to me than irrelevancies like his personal wealth.


  16. - wordslinger - Tuesday, Jun 5, 18 @ 12:08 pm:

    –In an adverse economic condition the IL bondholders will be in a much riskier investment than those from any of the other 49 states.–

    BS, word-salad-chef.

    Tell me, what is the coverage on Illinois debt service right now? To what X factor? You don’t have a clue, do you?

    You’re in over your head, with your shallow talking points gibberish. Save it for your pretend cable news playtime, we’re talking real money here.

    By the way, how’s your AAA Enron and subprime MBS paper looking these days? Paper the WC with it?


  17. - taxboy - Tuesday, Jun 5, 18 @ 12:19 pm:

    Why is it we continue to give such credibility to these rating agencies? These are the folks that brought us the subprime mortgage disaster 10 years or so ago.


  18. - Anonymous - Tuesday, Jun 5, 18 @ 12:35 pm:

    ==pensions were just too unrealistic==

    A bunch of hooey. They seem too much because the state ripped off employees of contributions to their retirement fund. Gee, I guess if you only put a dime in the grocery fund for your famiy each week, the grocery bill might seem insurmountable too. Wise up.


  19. - Michigan Fable - Tuesday, Jun 5, 18 @ 12:46 pm:

    For anyone who can read, all you have to do is look at Michigan in the mid-2000’s. The state’s fiscal position kept worsening, so what did the Tax & Spend Dem’s do? They kept raising taxes on the ones who stayed. And then, more people kept leaving Michigan. Illinois is headed down the same path. We are the most highly taxed state in the nation (when you factor in state, sales, local taxes)

    And guess what is happening? Illinois is losing residents. So, what will happen over the next 10 years, as pension payouts continue to rise, and there are fewer of us. I’ve got $1 million on taxes being raised. And another $1 million on us losing even more residents.

    What turned Michigan around? A true Republican legislature and Governor (not the phony ones that IL seems to have)

    My advise - get out now, before the value of your home goes down 50%


  20. - Demoralized - Tuesday, Jun 5, 18 @ 12:46 pm:

    ==I think now/near future would actually be a good time to head out==

    Bye. Less whining and more action. Better get out soon since the sky seems to always be falling in the world of some of you.

    Drama queen is right.


  21. - RNUG - Tuesday, Jun 5, 18 @ 12:47 pm:

    == Among the state’s leading credits risks are its fiscal structure, which in our view, remains out of balance, ==

    Translation: you aren’t taxing the right things (services)


  22. - City Zen - Tuesday, Jun 5, 18 @ 1:04 pm:

    == Among the state’s leading credits risks are its fiscal structure, which in our view, remains out of balance, ==

    Translation: you aren’t taxing the right things (retirement income)


  23. - The Dude Abides - Tuesday, Jun 5, 18 @ 1:53 pm:

    @City
    You realize that if you tax state retirees pension you have to tax everyone in the state that has retirement income. Take in consideration that those of retirement age proportionally vote in higher numbers than any other age group. When you get right down to it how did Illinois get into this position? It was because of lack of political courage.
    Honestly if they created a pension tax bill exempting say the first $50K from taxation I wouldn’t have a big problem with it.


  24. - City Zen - Tuesday, Jun 5, 18 @ 2:31 pm:

    ==You realize that if you tax state retirees pension you have to tax everyone in the state that has retirement income.==

    I said retirement income, no?

    ==Honestly if they created a pension tax bill exempting say the first $50K from taxation…==

    Phase it out at $50K and you got yourself a deal. I see no reason to offer a $100K pensioner a $50K tax break. But if you want to extend that same deduction to all income, I’m in.


  25. - Occam - Tuesday, Jun 5, 18 @ 2:48 pm:

    === If you wait too long, the window will close and you won’t be able to even give your house away. ===

    ==Yes, all will be a vast wasteland.

    Drama queens abound.==

    And here I thought I was being plainly obvious.


  26. - City Zen - Tuesday, Jun 5, 18 @ 4:09 pm:

    ==Gee, I guess if you only put a dime in the grocery fund for your family each week, the grocery bill might seem insurmountable too.==

    Especially if you were eating prime rib on Sunday night.


  27. - 44th - Tuesday, Jun 5, 18 @ 4:32 pm:

    Well corrupt public pension plan is killing us all while a few eat at the trough.


  28. - RNUG - Tuesday, Jun 5, 18 @ 4:48 pm:

    == Well corrupt public pension plan is killing us all while a few eat at the trough. ==

    Obviously, you have read none of the pension analysis reports. The State’s failure to contribute is the majority cause of the problems today.


  29. - Anonymous - Tuesday, Jun 5, 18 @ 5:50 pm:

    The envy and jealousy of a guaranteed pension is palpable from some commenters. The media has done a fabulously exceptional job of leading those types to believe that all pensioners are luxuriating in wealth. There are facts that would inform them that this is not the case for almost all. Media has been diligent in broadcasting the atypical retirees who are luxuriating and making fools believe that this is the norm.

    Either those fools are very very misinformed or their misinformation fuels their jealousy and serves that purpose for them. And they are happy to gripe.


Sorry, comments for this post are now closed.


* Everyone has their own priorities
* There's a simple explanation for this
* 1,287 new cases, 73 additional deaths
* Pritzker says one of his office employees has tested positive - Largest single-day death toll so far - 3680 hospital patients yesterday - "43% of our total hospital beds are available and 35% of our ICU beds are available" - Non-COVID hospital visits drop due to stay at home order - Usage trend up 8 percentage points for ICU beds and 5 points for ventilators in a week - Some Chicago-area ICU units "near max capacity" - Peoria and Edwardsville see available ICU beds dropping - New cases in 23 more counties in last week alone - Thanks Gov. Newsome for 100 ventilators - Placed orders for 3620 more ventilators - 25 percent reduction in detained juvenile population - No "regular close contact" with infected staffer - Pritzker not tested - Won't comment about report of 12,000 body bags ordered - State and locals checking records for missed COVID-19 deaths - Not encouraging arrests - No special policing orders issued - Asked about regrets - Responds to Rep. Wilhour - No plan for regional stand down of order - Responds to Trump's latest claim - Addresses EO on prisoner release
* Where does Illinois rank in comparison?
* Question of the day
* Credit Unions Throughout Illinois Offering Modifications To Existing Loans
* Dr. Pliura goes to court
* NRCC escalates rhetoric against Casten, calling him "an asset for China’s Communist Party"
* What's up with this new EO?
* *** UPDATED x1 *** Playing a belated game of catch-up
* ACLU urges police restraint
* Rep. Wilhour wants "discussion" about herd immunity
* To Flowbee or not to Flowbee
* The numbers behind the bickering
* Good news, bad news
* Open thread
* *** LIVE COVERAGE ***
* Yesterday's stories

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