* Press release…

Moody’s has issued a short, new report (attached) following the State of Illinois’ (rated Baa3/stable outlook) recent flurry of legislation and signing of the FY 2020 budget. The bills, which the governor is expected to sign into law, are credit positive for the state’s local governments because they will receive new funding for capital and potential new sources of operating revenue. The primary winners in the new budget are the state’s school districts designated as Tier 1 or Tier 2, including Chicago Public Schools (CPS – B2/stable), as those districts received a $375 million bump in formula funding.

For the third straight year, Illinois’ budget prioritizes K-12 education funding by exceeding the aggressive funding targets called for by the evidence-based school funding formula, which categorizes each school district into one of four tiers based on need. Tier 1 and Tier 2 districts, including CPS, receive the vast majority of any boost in state funding. For fiscal 2020, the state will increase formula funding by close to $375 million, including $50 million for property tax relief, following boosts of $350 million in fiscal years 2018 and 2019. Nearly 70% of districts are currently designated as Tier 1 or Tier 2 and will receive over 90% of the increased funding. Other districts will continue to benefit from the formula’s “hold harmless” provision, which prevents reductions in state aid for any school district even if it currently is considered funded in excess of need or there is a drop in enrollment.

Local governments will receive a significant infusion of capital dollars under the Rebuild Illinois capital plan. The statewide motor fuel tax rate will double to 38 cents per gallon from 19 cents per gallon, increasing each year thereafter in line with inflation. The rate hike is projected to yield an additional $1.2 billion in revenue each year, approximately 32% of which will go to local governments. Certain counties will also be able to increase their local gas tax on top of the statewide bump.

The impact of legislation authorizing a massive expansion of gambling is less certain. The legislation will add six casinos, including in four cities that we rate: Chicago (Ba1/stable), Rockford (A2/negative), Waukegan (A2), and Danville (Baa3/stable). There will also be an expansion at the current ten existing casinos and of video gaming. The new casinos have the potential to generate significant revenues, but those revenues are difficult to project, particularly as the gambling landscape is becoming increasingly competitive. Furthermore, revenue-sharing provisions will dilute the impact for the individual cities receiving new casinos. Importantly, all of the cities chosen for casinos are grappling with rising pension costs. If the new casinos were to generate significant revenues, it could have a meaningful impact in comparison with pension contribution gaps using reported assumptions. However, the revenues produced by existing locations have steadily declined over the last five years, a trend that could be exacerbated by increased competition.

While credit positive, most Illinois local governments will receive minimal tax revenue from cannabis sales, if the state’s experience mirrors other states with legalized recreational cannabis such as Colorado. For example, in fiscal 2016, Denver (Aaa/stable) collected $27.6 million in cannabis sales taxes on roughly $500 million in gross sales, which amounted to a minimal 2% of general fund revenue. However, as with gaming revenues, cannabis revenue has proven to be volatile.

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.

* Hannah Meisel…

At a Capitol press conference on June 30, Pritzker told reporters that credit ratings agencies should look positively at the budget and capital bills, along with the revenues lawmakers approved to fund both.

“It took a lot of years for Illinois to get into the situation that we’re in today where the rating agencies have put us,” Pritzker said. “It’s going to take years for us to get out of it. But this is an enormous step forward.

“Think about it: a truly balanced budget where we’re actually going to pay off some of our debts,” the governor continued. “We’re beginning to address our pensions. We’re doing things that I think move us in the right direction from a financial perspective, a fiscal perspective, and I think the rating agencies will recognize that.”

Moody’s on Thursday did seem to recognize that, saying in a report and accompanying press release that the new budget and capital bills, along with the revenue from expanding gaming and legalizing marijuana will have a positive effect on local governments.