Illinois Legislature Approves Six-Month Budget to End Deadlockby
Bonds climb to three-week high as stopgap fix advances
Measure will fund schools, avoid massive shutdown of services
The Illinois legislature approved a six-month stopgap budget, marking a respite in a record-long impasse over the spending plan that triggered downgrades to the state’s credit rating.
As the compromise emerged, Illinois bonds rallied to a three-week high on signs the state would avoid a massive shutdown. Taxable pension bonds maturing in June 2033, the state’s most actively traded debt, sold for an average of 95.5 cents on the dollar, according to data compiled by Bloomberg. That pushed the yield down to 5.5 percent, about 3.7 percentage points more than benchmark debt.
With the fiscal year about to end, the House and Senate voted to approve a plan that would fund the government through December based on a deal reached by Republican Governor Bruce Rauner and top leaders of the Democrat-controlled legislature. The measure provides funding for operations like prisons and some social services and vendors that have been starved of state aid for the last 12 months because of the unprecedented standoff.
"This is a small step in the right direction,” Rauner told reporters in Springfield after the vote. “This is not a balanced budget. This is not a solution to our long-term challenges.”
The stopgap budget provides a temporary reprieve for Illinois, which had faced shuttered essential services, a halt to road construction, and the delayed opening of schools. Stuck in gridlock for the last 12 months, Illinois’s backlog of unpaid bills has soared to $7.8 billion. The state still lacks a full-year spending plan, and the consequences of the yearlong impasse have already wreaked havoc on its finances.
"Our job is not finished,” Speaker Michael Madigan, a Democrat who controls much of the legislative agenda, said after the House vote. “There is much more to do.”
This month Moody’s Investors Service and S&P Global Ratings downgraded Illinois to the lowest level for a state in over a decade, and investors are still demanding the highest spread from Illinois out of all 20 states tracked by Bloomberg. The state’s 10-year bonds yield 3.2 percent, or 1.9 percentage points above benchmark, according to data compiled by Bloomberg.
The compromise gets Illinois through the November election and allows lawmakers to address a full-year budget in January, when a simple majority is needed to pass legislation. Right now, three-fifths of lawmakers must approve bills, making consensus difficult.
The state has been stuck in gridlock since Rauner took office in January 2015. The former private-equity executive tried to tie any budget to structural changes like property-tax reductions, limits on unions and changes to worker-compensation laws. Democrats rejected those plans, saying they would hurt lower-income residents. When Rauner didn’t force his so-called turnaround agenda items into the stopgap budget, it paved the way for negotiations.
On Thursday, the legislature approved a stopgap budget that provides about $1 billion to higher education for this year and half of next, and funds human services, state operations and some capital projects that have been “mothballed” during the impasse, said Representative Barbara Currie, a Chicago Democrat.
The measure provides a full-year of funding for elementary and secondary education and boosts general state aid to schools, including $250 million through a so-called equity grant that will provide aid to districts with low-income students. Chicago’s schools will get about $100 million.
Lawmakers allowed the state not to repay most of $454 million of inter-fund borrowing. The bill removes restrictions on the issuance of refunding bonds to help fund higher education, and exempts state bonds sold next year from a 7 percent debt-service cap.
As part of the compromise, Illinois will shell out about $215 million next year to help fund Chicago teachers’ pensions for one year. In the past, the state only paid about $12 million toward that retirement bill. Lawmakers also authorized Chicago to establish a property tax levy up to $250 million specifically to help cover the cost of its schools’ pensions. The pension system was only 52 percent funded as of June 30, 2015.
The measure hardly solves the state’s problems. The state still has $111 billion of unfunded pension liabilities and is the lowest rated state in the nation. Several lawmakers lamented the lack of a full year spending plan ahead of the vote.
“This isn’t a solution,” Representative Jack Franks, a Democrat who isn’t running for re-election, said before the House vote. “This is just a way to delay the day of reckoning.”