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Moody’s: Budget, capital bills “credit positive” for local governments, schools

Friday, Jun 14, 2019

* 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.

- Posted by Rich Miller        

  1. - Grandson of Man - Friday, Jun 14, 19 @ 9:43 am:

    The IMA praised the budget (tax breaks) and capital bill. That’s great and really hope manufacturing and people in trades do real well, as well as all of us who will benefit from better infrastructure.

  2. - Robert the Bruce - Friday, Jun 14, 19 @ 9:45 am:

    Given the significant change in philosophy and action of this governor compared to the last governor, it’s ridiculous that Moody’s isn’t changing the rating.

  3. - Rabid - Friday, Jun 14, 19 @ 9:52 am:

    JB’s trickle down property tax relief, fightin for the middle class

  4. - Juvenal - Friday, Jun 14, 19 @ 9:54 am:

    The corner that Bruce Dold, John Kass, Kristen McQueary, the Illinois Policy Institute, and the Eastern Bloc have painted themselves into is getting smaller,

    and smaller,

    and smaller.

    Really, we just need to hear from Jim Edgar, Governor Thompson, and Caterpillar now.

  5. - ??? - Friday, Jun 14, 19 @ 10:06 am:

    At a Capitol press conference on June 30, Pritzker told reporters….”

    I’m guessing that should be June…13th, maybe?

  6. - PublicServant - Friday, Jun 14, 19 @ 10:11 am:

    The rating will rise once the state dumps its current regressive flat tax, and approves the fair tax amendment. Ratings agencies like it when you tax those raking in all the GDP gains these days, instead of trying to tax those whose wages have stagnated so others could increase “their” profits.

  7. - City Zen - Friday, Jun 14, 19 @ 10:29 am:

    ==The rating will rise once the state dumps its current regressive flat tax==

    New Jersey would like a word with you.

  8. - PublicServant - Friday, Jun 14, 19 @ 10:53 am:

    CZ, are you saying that New Jersey’s rating fell as a result of their instituting a progressive tax structure?

  9. - City Zen - Friday, Jun 14, 19 @ 11:59 am:

    PS, the tax structure has nothing to do with the rating. North Carolina moved from a progressive to flat income tax years ago and remains one of the top credit-rated states in the nation.

  10. - Grandson of Man - Friday, Jun 14, 19 @ 12:43 pm:

    Many states have graduated income taxes. The majority if not vast majority are probably in better financial shape than Illinois.

  11. - The Dude Abides - Friday, Jun 14, 19 @ 12:43 pm:

    The state has a long ways to go but for the first time in years there’s reason for optimism that we’re finally starting to move in the right direction.
    Rauner said that paying down our debt and the state’s credit rating weren’t all that important. It’s hard to believe that a Governor would spout such nonsense.

  12. - Maximus - Friday, Jun 14, 19 @ 3:14 pm:

    The graduated income tax wont impact the ratings given by Moodys and other rating agencies. It stopped Illinois from descending into junk rating status. The rating will rise once the numbers show total debt lowering but there is still a long ways to go before that happens.

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