Fitch Ratings-New York-26 February 2019: The fiscal 2020 executive budget plan recently introduced by Illinois' governor would not materially address the state's structural budget issues in the current fiscal year or the next, says Fitch Ratings.
Illinois' 'BBB' Issuer Default Rating (IDR) reflects an ongoing pattern of weak operating performance and irresolute fiscal decision-making. The Negative Rating Outlook reflects our assessment that near-term fiscal challenges will pressure the rating.
Fitch has indicated that we would lower the state's IDR if Illinois returned to a pattern of deferring payments for near-term budget balancing. Elements of the governor's proposal, including a $1.5 billion GO bill backlog borrowing that reduces but leaves largely unresolved the 2019 deficit and numerous one-time measures in fiscal 2020, appear to do that without a clear path toward long-term balance. The legislature will take up the executive budget, a multi-part pension proposal, and a possible capital improvements bill over the next several months, with the goal of enacting a final budget by June 30. Fitch plans to review the state's rating and Negative Outlook following passage of a final budget for fiscal 2020.
A return to single-party control could ease the legislature's budget review and adoption process this year, but unified control is not a panacea for Illinois. It also would not mean the end of the state's credit challenges, which have persisted regardless of the political make-up of the state government. Illinois faces significant fiscal problems that will likely take multiple years to fully address, but the executive budget does not provide enough clarity on how the state will deal with them.
The governor's fiscal 2020 budget plan relies heavily on non-recurring revenues and large savings from an uncertain pension proposal that poses risks for the state. The budget plan could also be challenged from the start if the sizable fiscal 2019 gap is not adequately addressed. The governor framed the $38.7 billion general funds ($77 billion all funds) plan as a bridge budget that would buy time until the state is able to implement his proposed graduated income tax and then achieve more substantive fiscal progress. This new tax requires a state constitutional amendment that must be approved by legislative super-majorities (which Democrats have in both chambers) and then by voters, also by a super-majority. Fitch estimates the earliest it could be approved would be in the November 2020 general election and notes that prospects for passage at both levels are uncertain.
Fiscal 2019's gap, estimated at $1.1 billion in the general funds, poses a particular challenge for the state, and the administration's budget plan leaves it largely unresolved. The governor proposes a $1.5 billion general obligation (GO) bond sale to reduce backlogged bills. $600 million of the proceeds would be deposited directly in the general revenue fund to pay down remaining interest accruing bills. After accounting for other adjustments to the budget, the general funds deficit declines modestly to an estimated $900 million. The remaining $900 million from the GO sale would be deposited in the Health Insurance Reserve Fund (outside of the general funds) to cover unpaid employee health insurance bills.