Budget on front burner as Illinois legislature returns

Illinois lawmakers return to work Wednesday with the task of crafting a fiscal 2023 budget taking center stage.

Municipal market observers want to see if the state government can maintain the fiscal trajectory that won it rating upgrades in 2021.

The condensed session is slated to end a month early in April. Among the issues on lawmakers’ plates are how to spend the remaining funds from Illinois’ $8 billion share of the American Rescue Plan Act and considering a repayment plan for a $4.5 billion federal unemployment trust fund loan.

Several pension-related matters that impact Chicago, Cook County and suburban and downstate public safety pension funds also may receive an airing but their fate is uncertain given the abbreviated session, uncertainty over future session days amid surging COVID-19 cases, and the looming state elections based on newly drawn districts.

The primary occurs in June with the general election following in November.

“I have one priority every session that is the number one priority and that is balancing our budget — making sure we are doing the right thing to put our state on firm fiscal footing, to continue to get credit upgrades as we have and to make sure we are providing the services people need,” Gov. J.B. Pritzker said in response to questions at a news conference last week.

Legislative leaders echoed that position.

“First and foremost on the list is a responsible balanced budget,” John Patterson, a spokesman for Senate President Don Harmon, D-Oak Park, said in an email. “Our current economic stability has led to credit rating improvements and the fastest state payment cycle in recent memory.”

The session opens Wednesday after the leaders cancelled floor sessions for Tuesday and Thursday due to surging COVID-19 cases. The fate of session dates slated for later this month is uncertain but virtual committee meetings are scheduled throughout the month.

The spring session is slated to end April 8, weeks ahead of its usual deadline of May 31 after which a supermajority vote is required for legislation to take effect immediately.

Budget
Pritzker, a Democrat who enjoys Democratic supermajorities in the House and Senate, will lay out his budget and State of the State address on Feb. 2.

The state’s revenue update and five-year forecast released in November showed the state is on track to record a $1.7 billion surplus in the current fiscal year. Pritzker plans to use the funds to make a $300 million deposit into the state’s empty rainy day fund and pay down $900 million of overdue bills.

After that, the state expects to end the current fiscal year next June with a $406 million ending balance, up from the $88 million projected when the budget was adopted in the spring, according to the Economic and Fiscal Policy Report.

Projected gaps heading into future years resurface with a $406 million hole projected in fiscal 2023, rising to $820 million in fiscal 2024, and peaking at $1.1 billion in fiscal 2025 before falling to $903 million in 2026 and $600 million in 2027.

The state projects ending the current fiscal year with its unpaid bill backlog, closely watched by rating agencies and investors as a sign of the state’s fiscal liquidity health, at $2.75 billion. That’s down from $4 billion for fiscal 2021. Comptroller Susana Mendoza reports that invoices are being paid within 30 days, what she said is considered a standard bill cycle.

The current budget relies on $2 billion in ARPA relief to make up for lost revenues due to the pandemic and spends another $3 billion on infrastructure, violence prevention, education, healthcare, affordable housing, and economic recovery. The remainder of the $8 billion is reserved for future spending.

Republicans are pressing the state to hold spending in check given that the state will exhaust federal coronavirus relief aid in the coming years. Civic groups too are urging caution as deficit loom.

“It is important that the state avoid facing a revenue cliff from use of ARPA funds as it makes its plans to spend the rest of its $8.4 billion allocation,” the Chicago Civic Federation said in a December review of the state’s forecast.

The state’s fiscal management through the pandemic, bolstered by federal relief and a robust recovery of tax collections similar to other states, drove upgrades in June from Moody’s Investors Service and S&P Global Ratings that moved the state to two notches above junk — still the lowest among states.

S&P in November also raised the state’s outlook to positive. Fitch Ratings also in June raised its outlook to positive from negative on the BBB-minus rating, by passing stable.

The rating improvements are reflected in the market.

Spreads tumbled on Illinois’ $400 million competitive general obligation issue in late November to 54 basis points on a 10-year maturity that’s now trading around 61 bps and the 11-year bond landed at a 57 bp spread and is trading at a 61 bp spread.

The spreads marked the lowest state yield penalties in a decade. The 10-year in the state’s March GO sale landed at a 115 basis point spread to the Municipal Market Data’s AAA benchmark after narrowing from a 268 bp spread on an October 2020 issue.

In addition to the budget, the Pritzker administration said it’s working with legislative, labor, and business leaders to come up with a repayment plan for the state’s $4.5 billion outstanding unemployed trust loan from the federal government after accounts were emptied due to the surge in unemployment early in the pandemic.

Republicans want to direct some of the remaining ARPA funds to pay down the loan to ease the potential impact on businesses. Mendoza joined with seven other states in December in asking the Department of Treasury to halve the accrual of interest that began in September.

Fixes used to manage the last big unemployment trust deficit included a $1.5 billion bond sale in 2012 secured by a first lien on a portion of state employer contributions to the trust fund.

Pensions
Several pension measures that could impact Chicago’s cost for its police fund, revise Cook County’s payments, and provide near-term relief for some downstate and suburban local governments drowning in public safety pension debt are brewing but whether they see debate is uncertain.

Sen. Robert Martwick, D-Chicago, who chairs the Senate’s pension committee, plans to try to move his legislation that would bring the cost-of-living adjustments, or COLA, for all police in the city’s older tier one benefit scheme up to a simple 3% annual increase despite their birth date. The city has long made the upgrade every few years as birth dates hit.

“It’s a matter of transparency,” Martwick said Monday. “It’s just pulling back the curtain and exposing what the true liability is and putting more in now lowers the future cost. It ultimately will save Chicago taxpayers money in the long run.”

The legislation mirrors a firefighters’ measure that lawmakers approved last year and Pritzker signed into law over the objections of Mayor Lori Lightfoot who called it a mandate the city can’t afford. City pension contributions rose to $1.8 billion in 2021 and will jump again to $2.28 billion this year as actuarially based contributions hit for the municipal and laborers’ funds.

The firefighter cost amounts to $18 million to $30 million annually and up to $823 million by 2055 when the fund is slated to reach a 90% funded ratio, according to the city. Martwick counters that the price is far less. The police fund poses a greater annual burden of up to $90 million and as much as a total price tag of $3 billion, according to the city.

Martwick said talks are ongoing in an attempt to reach agreement between Cook County and its pension fund on legislation that would cement an actuarial contribution requirement. The county has sent more than $2 billion in supplemental pension contributions to the fund in recent years on top of a $200 million payment owed under a statutory formula required under state law.

Incorporating the extra contributions into the funding scheme puts the county on a full funding path by 2046. Without the extra infusion, the fund would be on track to exhaust all assets by 2047. The county and fund have argued over future pension fund membership, healthcare guarantees, and the timing of moving to a full actuarial contribution.

The Illinois Municipal League is pressing lawmakers to consider a re-amortization of the funding schedule that would extend the target date for achieving 90% funding beyond fiscal 2040, and lower the funding target to 80% from 90%.

The unfunded liabilities of Illinois’ suburban and downstate public safety pensions stand at $13 billion in the last year of compiled results reported to the state.

“I think they have to be given serious consideration but the devil is in the details but I don’t think there is the time to do the necessary vetting of those proposals,” Martwick said. “I don’t think anyone has the appetite to leap before they take a deep look.”

The condensed session also likely doesn’t allow for any broader consideration of pension proposals that address local government or the state’s pensions, Martwick said.

The state’s near-term contributions are leveling off and remain between $9.4 billion to $9.9 billion through 2027. Strong 20% returns helped actually slightly trim the unfunded liabilities, but the current $139.9 billion tab and 42.4% funded ratio weighs heavily on the state’s rating and market perceptions.