Illinois Awash in Red Ink as Budget Deal Buys It Six More Months

  • Six-month spending plan jeopardizes funding as 2017 begins
  • With no new revenue, there’s no fix for deficit, pensions

In Illinois, roadwork won’t grind to a halt, prisons won’t run out of food and schools will reopen on time. But the six-month stopgap budget that averts a government shutdown is only digging the state deeper into the hole.

With no agreement between Republican Governor Bruce Rauner and the Democrat-led legislature over how to raise revenue, the state is on track to spend $5.5 billion more than it brings in by the end of June, according to initial estimates from the Civic Federation, a watchdog group. And the appropriations make no dent in the $111 billion debt to the state’s pensions, one of the biggest drags on Illinois, whose credit rating has fallen lower than any U.S. state in over a decade.

“This is a political gimmick to bring to resolution the state of Illinois’s inability to deal with its major issues,” said Laurence Msall, president of the Chicago-based federation, which tracks the state’s finances. “It does not end the fiscal crisis.”

The compromise, struck on June 30, ended a record stalemate between the first-term governor and lawmakers that had left Illinois without a budget for a year because of a clash over how to erase the deficit. The deal prevented a public backlash amid warnings that the ripple effects were poised to worsen, though it’s only a temporary fix for universities, social-services providers and other agencies. The state’s bond rating is still at risk of being cut even more.

The political thaw was welcomed by investors, who demand yields on Illinois bonds that are higher than any of the other 19 states tracked by Bloomberg.

“There’s been such a vacuum of anything positive from a progress standpoint that this shred of progress was viewed positively,” said Gabe Diederich, a portfolio manager in Menomonee Falls, Wisconsin, at Wells Fargo Asset Management, which holds about $39 billion of state and local debt, including Illinois’s. “It doesn’t dramatically tackle the fundamental problems at hand.”

Bond Rally

Illinois’s taxable pension bonds due in June 2033 traded at an average of 98.5 cents on the dollar on July 7, the highest since April 2015, according to data tracked by Bloomberg. That pushed the yield on the debt, the state’s most actively traded, down to 5.25 percent, about 3.6 percentage points more than benchmark debt.

The gains coincided with a broader rally in the $3.7 trillion municipal market as the U.K.’s vote to leave the European Union spurred investors to shift money into the safest assets. Even with those gains, investors are demanding an extra 1.8 percentage points to hold the state’s 30-year bonds. That’s the highest spread since February.

The budget plan will, however, allow Illinois to start chipping away at a $7.7 billion backlog of unpaid bills to contractors and others. It boosts funding for schools by $520 million to $7.2 billion, according to Rauner’s office. Human service providers and programs won $667 million from the stopgap budget, which is only 65 percent of the funds needed to cover last year and keep them through December, according to the Civic Federation, which cited legislative reports.

Lawmakers and Rauner allocated $1 billion for colleges and universities, which had gone without state aid for most of the past year, forcing them to use their own funds to cover grants to low-income students.

University Downgrades

The funding came too late for some. The same day the budget cleared the legislature, Moody’s Investors Service downgraded six public Illinois universities, four of which are rated junk. The stopgap fix is only “temporary liquidity relief,” the rating company said in a statement.

While Illinois is providing about $321 million for scholarships to low-income students, that will merely reimburse the schools for what they’ve already spent. As a result, there’s nothing left for the coming year, said Lynne Baker, spokeswoman for the Illinois Student Assistance Commission.

“There’s much more work to do,” said Tim Killeen, president of the University of Illinois.

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