Illinois Government Stumbles Toward Shutdown in Budget Stalemate

Illinois gubernatorial candidate Bruce Rauner leaves a campaign event on September 23, 2014 in Chicago, Illinois.

Photographer: Scott Olson/Getty Images

Illinois’s cash-short government moved closer to a shutdown Tuesday as a partisan budget impasse threatened the delivery of services and paychecks to tens of thousands of employees.

With a new budget year beginning Wednesday, the Democratic-controlled legislature and Republican Governor Bruce Rauner remained far apart on how to close a budget hole of at least $6.2 billion.

“We’ve got a mess,” Rauner told employees of the state’s emergency management agency Tuesday in Springfield, the capital.

“It’s going to take a little while to fix. I hope we can get it fixed promptly. We’re fully capable of it.”

Budget gridlock has been building since Rauner was elected in November as the first Republican to hold that office in 12 years. The former equity capital executive campaigned on a pledge to cut spending, reform government and cut or hold the line on taxes.

Democrats have been equally resolute in their insistence that new tax revenue be part of the budget. The cash crisis worsened when lawmakers allowed a temporary income-tax increase approved in 2011 to expire on Jan. 1.

The immediate effect of a shutdown is in dispute. While Rauner said he would ensure that employees are paid and that services continue, Democratic Attorney General Lisa Madigan said paychecks are uncertain if no budget is in place by Wednesday.

Market Disquiet

The crisis also extends to the state’s largest school district. Lawmakers returned to Springfield facing a bill that would grant Chicago Public Schools six more weeks to come up with a $634 million pension payment due Tuesday.

The House of Representatives was expected to consider the measure giving the nation’s third-largest system until Aug. 10 to make the contribution. That’s the day that state aid payments to school districts are set to be delivered. The measure, already passed by the Senate in April, failed in the House last week.

The broader standoff is causing disquiet in the market.

“It causes pain in the meantime, and it just raises some concern from an investor’s point of view,” said Gary Pollack, who manages $6 billion of munis, including Illinois holdings, as head of fixed-income trading at Deutsche Bank AG’s private-wealth management unit in New York. “It just creates uncertainty.”

Rauner vetoed $4 billion in spending last week, calling the budget sent to him “unbalanced and therefore unconstitutional.” However, Rauner did sign school-aid payments.

Illinois has the lowest credit rating of U.S. states. It is graded A3 by Moody’s Investors Service and an equivalent A- by S&P. While both give it a negative outlook, S&P put Illinois on review for a rating cut after the state’s highest court overturned a 2013 pension overhaul intended to resolve a $111 billion unfunded retirement liability.

About $10 million of Illinois debt exempt from federal taxes that matures in May 2025 changed hands on the last day of the fiscal year at an average yield of 4.07 percent, the highest since the bonds were sold in May 2014, according to data compiled by Bloomberg.

That’s about 1.8 percentage points above benchmark munis, the widest spread since the securities were issued.

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