All Press Items

February 20, 2024

(Bloomberg) -- Illinois is facing its first budget deficit in three years as the state deals with rising costs for everything from education to services for migrants. Governor J.B. Pritzker, a billionaire Democrat serving his second term, is scheduled to outline his spending plan for the fiscal year starting July 1 on Wednesday. After back-to-back annual budget surpluses, Pritzker will have to find ways to close a budget gap that is only expected to widen the next few years.

His budget office projected last week a $721 million deficit for fiscal 2025. Robust revenue growth at the beginning of fiscal 2024 has already shown signs of slowing while spending needs increase.

“This year is going to be a more difficult budget year than folks have seen in the last five or six years,” said state Representative Jehan Gordon-Booth, one of the lead budget negotiators in her chamber. “It’s going to be much tighter than most folks have grown accustomed to.”

The governor’s forecast provides the difference between revenue and expenditures in its general funds that he must close with legislators annually. A deficit was estimated for fiscal 2022 at the start of that year but rising revenue and federal aid helped more than cover the gap.

“The Governor has proposed and passed five balanced budgets that have led to nine credit upgrades, and he looks forward to building on that progress,” Jordan Abudayyeh, a spokeswoman for Pritzker, said in an email.

Illinois over the last three years has enjoyed a significant financial turnaround after enduring the initial shocks of the pandemic. The state used surpluses to pay back debt as well as unpaid bills. It also built up its rainy day fund from almost nothing to nearly $2 billion and boosted contributions to its underfunded pensions.

Plus, the state received about $8.1 billion from the American Rescue Plan Act to mitigate fiscal impacts of the pandemic.

“Illinois’ fiscal management has continued to improve under the current administration, and we expect the proposed budget will again be balanced,” said Dan Close, head of municipals at Nuveen, which holds Illinois debt. “Investors will be looking for the state to continue to build up budget stabilization reserve funds and ensure adequate pension funding through supplemental appropriations.”

Positive Steps

The state’s improvements have allowed it to borrow from the $4 trillion municipal bond market at a lower penalty. The spread on Illinois’s 10-year bonds shrank to below 66 basis points above the AAA benchmark Tuesday morning, it was as much as 440 basis points in May 2020 at the height of the pandemic, according to data compiled by Bloomberg.

Additionally, Illinois has secured a string of credit rating upgrades over the last few years, pulling back from the brink of being cut to junk at the start of the pandemic. Fitch Ratings, S&P Global Ratings and Moody’s Investors Service have all lifted their ratings for the state to the A level. Still, it remains the lowest-rated US state and far below AAA-rating states such as Texas and Florida. “The state has been taking a lot of positive steps,” said Eric Kim, an analyst for Fitch. However, “there are still challenges,” he added.

Among them is the state’s pension gap, which has expanded to $142 billion. The unfunded pension liability across Illinois’s five retirement systems contributes to the state’s historical imbalance between revenue and spending.

“The bottom line is we have a structural deficit in Illinois,” said Ralph M. Martire, executive director for the Center for Tax and Budget Accountability, adding that rapid economic growth and federal aid “helped to mask that.” Looking ahead, the state won’t have pandemic funds to rely on and the economy may slow albeit with a so-called soft landing.

“There are going to be pressures coming the governor’s way,” Martire said, adding that he doesn’t expect to see any cuts in spending, but the state will take “a slightly more austere approach.”

Focus on Fiscal Stability

During the last few years, Pritzker and the Democrat-controlled state legislature boosted funding for education, health care and housing. Illinois taxpayers also received temporary relief from property and grocery sales taxes. Lawmakers will review the governor’s proposal and vote on it in a few months, said Illinois Senator Elgie Sims, a lead budget negotiator in his chamber.

Sims said he expects the governor’s next budget to build on past success and focus on fiscal responsibility while still investing in areas such as education and senior services. Illinois’s deficit should be watched closely especially after overcoming past bad practices such as underfunding pensions, said Joe Ferguson, president of fiscal watch dog group the Civic Federation. Its unfunded pension liability ballooned largely because the state didn’t put in enough contributions for years. Illinois’s budget impasse from 2015 to 2017 between then Republican Governor Bruce Rauner and the Democratic general assembly led unpaid bills to top $16 billion, a figure that was paid off.

“Saw that scary movie and don’t want to see it again,” Gordon-Booth said. “The north star has to be fiscal stability.”

 

Source: Bloomberg