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The fiscal 2021 executive budget recently introduced by Illinois’ governor includes a significant $1.4 billion contingency tied to voter approval of a constitutional amendment in November that would allow the state to implement graduated income tax rates, which are already statutorily approved. Under the governor’s budget proposal, failure of the income tax amendment would trigger fiscal actions that could exacerbate the state’s structural budget challenges and pressure local governments, particularly school districts, says Fitch Ratings. The proposal now moves to the legislature for consideration, and Fitch will evaluate the final budget once enacted.
Illinois’ ‘BBB’ Issuer Default Rating (IDR) reflects an ongoing pattern of weak operating performance and irresolute fiscal decision-making that has produced a credit position well below the level that the state’s broad economic base and substantial independent legal ability to control its budget would otherwise support. The state’s elevated long-term liability position remains a key credit challenge. As of Fitch’s December 2019 State Pension Update report, the state’s combined debt and Fitch-adjusted pension burden was 27.5% of personal income, well above the 5.7% state median and the highest of the states. Fitch estimates the state’s total long-term liabilities at approximately $200 billion with pensions accounting for 80% of the total.
Response to Income Tax Amendment Vote Will be Critical
Fitch has indicated that the credit implications of the November 2020 vote on the income tax amendment depend on whether Illinois uses any increased revenues to address structural budget challenges, or if the state can adequately adjust its budget to work toward structural balance if the amendment fails. In his executive budget, the governor proposes to hold $1.4 billion of budget actions in reserve, dependent on voters’ decision. If the amendment fails some of the governor’s proposals, including deferral of up $400 million in employee health insurance costs and more than $500 million of interfund transfers or borrowings, would risk exacerbating the state’s structural budget challenges. If voters approve the constitutional amendment the governor’s executive budget would avoid such non-recurring measures and appears to continue recent progress towards structural balance.
Pensions Pose Structural Budget Challenge
Importantly, Fitch notes that pension contributions remain a point of structural weakness for the state, regardless of the income tax amendment vote, as the governor’s proposal continues the practice laid out in current law of underfunding the systems relative to actuarial determinations. The state currently structures its contributions to pension systems to target 90% funding by 2045, short of the actuarially determined contributions (ADCs), which target 100% funding. Fitch considers full ADC contributions to be a crucial element of structural balance.
Based on analysis of the state’s fiscal 2018 CAFR, Fitch estimates Illinois’ actual pension contributions totalled approximately $7.7 billion, 71% of the ADC of $10.9 billion that year, a gap of more than $2.0 billion; the gap likely increased since then given the underfunding embedded in the statutory 90% target. Fitch believes the supplemental annual pension contributions of $100 million-$200 million proposed by the governor if the income tax amendment passes would be helpful. But on their own, they would not materially affect Fitch’s view that the state’s budget remains structurally unbalanced given the sizable gap between actual contributions and the ADC. As with other states, Illinois retains substantial budgetary powers allowing it to manage the associated fiscal challenges at a level commensurate with its ‘BBB’ IDR.
Executive Budget Implications for Local Governments
For local governments, and particularly school districts, the $1.4 billion of reserved items in the governor’s budget proposal pose risks. The 2017 statute establishing the revised evidence-based funding formula (EBF) for K-12 school aid established a target of annual increases of $350 million. In the current year, the enacted budget included slightly more than that, with a $379 million increase. For fiscal 2021, the governor’s executive budget holds $150 million of the suggested $350 million increase, or more than 40%, in reserve, to be released only if voters approve the income tax amendment. The governor’s office notes that a $200 million increase would still reflect a higher annual growth rate than school districts have received over the past decade and the total increase in EBF funding since fiscal 2018 would total $1.3 billion.
Several additional measures could also affect local governments, but generally to a much less significant degree. The governor proposes holding approximately $100 million in combined income tax and sales tax revenue shared with local governments in reserve, pending voters’ decision on the income tax amendment. Additionally, $40 million in increased state funding for school districts for certain mandated categorical items is likewise held in reserve in the executive budget plan.
* Speaking of local government funding…
Municipalities Push for Full Restoration of Local Revenue Sharing in “Moving Cities Forward” Legislative Platform
WHO: Brad Cole, Illinois Municipal League Executive Director
Leon Rockingham Jr., North Chicago Mayor and IML President
Catherine Adduci, Mayor of River Forest and IML second vice presidentWHEN: Monday, March 2, 2020
10:00 a.m.WHERE: Illinois State Capitol Blue Room (basement, room 010)
401 S. 2nd Street
Springfield, IllinoisWHAT: Municipal leaders will unveil their 2020 “Moving Cities Forward” legislative platform designed to ensure the long-term success of Illinois’ cities, villages and towns. The platform includes proposals to reinstate full funding to the Local Government Distributive Fund, empower non-home rule communities and expand the state’s Financially Distressed Cities Law.
posted by Rich Miller
Monday, Mar 2, 20 @ 9:51 am
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==If voters approve the constitutional amendment the governor’s executive budget would avoid such non-recurring measures and appears to continue recent progress towards structural balance.==
Fitch for the Fair Tax
Comment by Precinct Captain Monday, Mar 2, 20 @ 9:55 am
= ==If voters approve the constitutional amendment the governor’s executive budget would avoid such non-recurring measures and appears to continue recent progress towards structural balance.===
What Ms. Bourne sees… as hostage taking, Fitch sees as government understanding the importance of choices, and how elections have consequences.
Comment by Oswego Willy Monday, Mar 2, 20 @ 10:01 am
“If voters approve the constitutional amendment the governor’s executive budget would avoid such non-recurring measures and appears to continue recent progress towards structural balance.“
That will or should be a huge component of the Fair Tax campaign: fiscal responsibility and paying debts. If it wasn’t so beholden/catering to the wealthy, the Fair Tax should’ve had some popularity in the ILGOP. Many would get a tax cut and we’d have more money to pay our bills.
Comment by Grandson of Man Monday, Mar 2, 20 @ 10:10 am
This is the way I translate it:
If the graduated tax is approved, Illinois will continue to muddle through but at a bit better level than today. What was left implied is that Illinois would be better off using more of the new revenue to make actuarial level payments to the pension funds.
Comment by RNUG Monday, Mar 2, 20 @ 10:19 am
When interest rates go below zero problem solved.
Comment by Not a Billionaire Monday, Mar 2, 20 @ 10:55 am
If the Fair Tax included a provision that required that the state’ tax revenue differential from the current tax rate was used exclusively to pay the pension backlog, then I would think this was a good idea. Without something requiring that the increased revenues go exclusively to that effort, the can will continue to get kicked down the road to fund graft programs and other political priorities. The road-builders saw that reality and thus pushed the gas tax amendment.Joe six-pack can see that with this amendment. Without something forcing the general assembly to be responsible, this is just another blank check.
Comment by Just Another Anon Monday, Mar 2, 20 @ 10:56 am
@RNUG -
Correct.
The bond houses will always want 100 percent funded pensions.
They will also always want us to maximize revenue.
It’s helpful they point out that JB proposes making 71 percent of the actuarially required payment, which is 100 percent of the statutory requirement.
I always thought that 80 was sufficient to ensure solvency, and the 90 percent target was just enough to put a strain on our finances and never going to be enough to make the ratings agencies happy.
How would they feel if we increased the actual payment but lowered the target?
Comment by Charlie Brown Monday, Mar 2, 20 @ 11:06 am
==If voters approve the constitutional amendment the governor’s executive budget would avoid such non-recurring measures and appears to continue recent progress towards structural balance.==
Fitch telling voters about the connection between paying enough taxes to buy roads/bridges, IDHS protections for vulnerable children, police/fire protection, pay our debts and building a stable future for ourselves.
Comment by Froganon Monday, Mar 2, 20 @ 11:35 am
==I always thought that 80 was sufficient to ensure solvency==
80% is not an arbitrary solvency measure. It is the product of the assumed discount and investment return rates of the pension plan.
The question you need to ask is if the state pension plans are using rates that conform to the 80% principle.
Comment by City Zen Monday, Mar 2, 20 @ 12:13 pm
I’m OK with making ADC starting now, but getting the extra $2B might be a little tricky politically, and other needs such as DCFC where children are actually dying might overshadow the dry actuarial benefits of getting a little ahead on the ramp.
Comment by Jibba Monday, Mar 2, 20 @ 1:38 pm
If the so called fair tax is intended to stabilize State fiancés- why is the Governor devoting only 200 million of the proposed 3 plus billion of new revenues to pensions. Why isn’t it all going to pensions as opposed to BS spending on new or increased spending on social feel good programs. If it’s not 100 percent for pensions it ain’t worth doing
Comment by Sue Monday, Mar 2, 20 @ 5:09 pm
Not a Billionaire obviously didn’t get an MBA. Low rates have been a huge huge problem for all defined benefit pension plans. Rates at 8 percent reduce the need for contributions as opposed to rates where they are today
Comment by Sue Monday, Mar 2, 20 @ 5:12 pm
=== as opposed to … spending on new or increased spending on social feel good programs.===
Elections have consequences.
What you “feel” are … whatever… this governor ran on promises and policies and plans on spending on those policies.
“ as opposed to … spending on new or increased spending on social feel good programs.”
Love that you typed this. It crystallizes your… tolerance… and shows such anger for polices you deem… well, you typed what you typed.
Your tolerance and understanding how…
Winners Make Policy
… works. Your response is to belittle policy.
Comment by Oswego Willy Monday, Mar 2, 20 @ 5:14 pm
OW - but I guess your ok with not devoting more revenues from the fair tax toward pension stability. So again. - why bother. Where is the rest of the 3 plus Billion going off jog toward the reason he claims we need a new tax system
Comment by Sue Monday, Mar 2, 20 @ 6:33 pm
=== but I guess your ok with not devoting…===
I’m an adult that understands that winners make policy, and the voters and the promises made by this Governor are being measured in first a budget then with the progressive income tax he’s supporting
It in no way reflects his I may feel… or not feel… but I know elections have consequences too.
=== Where is the rest of the 3 plus Billion going off jog toward the reason he claims we need a new tax system===
You can vote no.
Also realize voting no will mean cuts or monetary shifts you may not like too.
=== So again. - why bother.===
My policy hope is that debt, all debt will be addressed in greater monetary weight. We will see what else it means after the voting results are realized in November
How’s that?
Comment by Oswego Willy Monday, Mar 2, 20 @ 6:39 pm
OW - How will Illinois solve its budget problem? We can universally acknowledge that winners make policy, but that conclusion doesnt solve the State’s immense financial problems. What bothers me is that the proposed incremental gain to the fisc from the Fair Tax is $3.2B, yet the operating deficit this year is $3.7B. How is the state to draw down its existing deficits and past due deficits, along with a $250B pension deficit and perhaps a $75B OPEB bill? Is the plan to borrow the way out of the problem? The credit markets won’t cooperate in a down market, and the carrying costs will be astronomical. I agree snide comments do not help, but what is the right approach to fixing the State’s finances? Even if the top three percent are taxed at 40 percent, the gap will only close modestly.
Comment by Willowglen Monday, Mar 2, 20 @ 6:45 pm
- Willowglen -
First explain the Edgar Ramp and explain when that amount drops and why.
=== yet the operating deficit this year is $3.7B. How is the state to draw down its existing deficits and past due deficits, along with a $250B pension deficit and perhaps a $75B OPEB bill? Is the plan to borrow the way out of the problem?===
The budgetary structural deficit by this administration in this budget is one thing, deciding to link that to “other” deficits without looking at the Edgar Ramp and how it fits to the pension crisis is trying to think all can be fixed in 12 minutes, without also looking at and understanding what that Edgar Ramp AND paying on the debt in accordance with that ramp, is not an honest discussion to the state finances.
=== Even if the top three percent are taxed at 40 percent===
Again, explain the Edgar Ramp.
Comment by Oswego Willy Monday, Mar 2, 20 @ 6:52 pm