Illinois' credit rating may be cut further as unpaid bills projected to reach $14 billion
Moody's Investors Service warned Illinois that its lack of a budget may lead to more credit downgrades.
The state has the lowest credit rating in the nation, at Baa2 with a negative outlook.
The ongoing financial issues in Illinois led to a credit downgrade in June, placing the state's credit rating only two notches above junk level. Although the Assembly failed to pass a full budget in June, lawmakers did pass a stopgap budget. The short-term budget did not address the entire state budget. It only allocated funding for education and a few other essential services through the end of the year. Several of the state's bills are being paid by court order without regard to the state's financial status.
While the stopgap budget and court orders pave the way for certain bills to be paid, the state's vendors are waiting for payments. Lawmakers are also waiting for paychecks because State Comptroller Leslie Geissler Munger ordered her staff to withhold legislators' pay this past spring. Munger's action includes all elected officials, including herself.
A state commission estimated that the general fund deficit will soar to $7.8 billion in fiscal 2017 from fiscal 2016's $3.8 billion. Without a full-year budget that addresses the state's expenditures, revenue and unpaid bills, the bill backlog will continue to grow. Moody's estimated that unpaid bills could grow to more than $14 billion by the end of the fiscal year June 30, 2017.
For a number of years, Illinois legislators have depended on deferring payments to help offset budget imbalances. Moody's warned that the vicious cycle of deferring bills is hard to end and results in a larger backlog of bills every fiscal year. In fact, the state missed its debt-service transfer to Metropolitan Pier and Exposition Authority last summer and was forced to delay its November pension contribution because of a lack of available funds.
In addition to the growing backlog of bills, Moody's noted that a temporary state income tax hike ended on Jan. 1, 2015. When the temporary tax ended, the individual tax rate dropped from 5 to 3.75 percent. The corporate tax rate also dropped, from 7 to 5.25 percent. The tax rollback resulted in a loss of more than $3 billion in revenue.
Moody's warned that if the state resorts to borrowing funds set aside for debt service to pay operating costs, it will further jeopardize the state's credit status. Gov. Bruce Rauner already has said that he is against borrowing from debt-service funds.
While the Illinois Constitution mandates a balanced budget, Illinois has not passed a balanced budget since 2001. This is a long-standing problem in the state, with only 15 balanced budgets passed between 1970 and 2016.
After the November election, the General Assembly will meet to work on a new full-year budget. Rauner hopes that the lawmakers can reach a compromise that addresses the budget imbalances, including reducing expenses and seeking new revenue sources. Pension and workers' compensation reform are among the issues to be addressed by the lame-duck Assembly before the new General Assembly takes office in January. Moody's said that if Rauner and the Assembly don't approve tax increases in November, the state's income tax revenue will be approximately $4 billion less than it was in fiscal year 2014.
Moody's said to improve the state's credit rating, Illinois needs to compile a balanced budget that addresses the unpaid-bill backlog and expenditures, and increases the state's revenue. An improved credit rating will reduce the interest paid on bonds and save taxpayer money.