Sunday 20th August 2017

Moodys: Illinois still could be downgraded to junk status, even with budget, tax hikes

Moodys: Illinois still could be downgraded to junk status, even with budget, tax hikes

    • By Dan McCaleb and Greg Bishop | Illinois News Network

7/6/2017

ILLINOIS NEWS NETWORK

Moody’s Investors Services might still downgrade Illinois’ credit rating to junk status even if a $5 billion tax increase and budget is enacted Thursday.

“Moody’s Investors Service has placed the general obligation rating of the State of Illinois, currently Baa3, under review for possible downgrade following the state’s failure to fully enact a timely budget for the fiscal year that began July 1, and its failure to achieve broad political consensus on how to move toward balanced financial operations,” a note from Moody’s posted Wednesday says.

A downgrade to junk status would mean taxpayers pay much higher interest rates on borrowed money. The state has a backlog of bills totaling about $15 billion. Borrowing to pay off some of that backlog is one of the options under consideration.

“The state anticipates addressing its approximately $15 billion backlog of payments owed partly through a bond offering that probably will rank among the largest in the state’s history,” Moodys said. “This component of the state’s broader fiscal plan leaves Illinois not only dependent on market access to ease liquidity pressures, but also facing a significant increase in its tax-supported debt burden,” also noting that “the state’s baseline tax collections declined in fiscal 2017, suggesting that any tax increase may yield less revenue than anticipated in coming months.”

Illinois also has pension deficits of at least $130 billion, and Moodys is questioning the state’s ability to address that despite a tax increase.

“So far, the plan appears to lack concrete measures that will materially improve Illinois’ long-term capacity to address its unfunded pension liabilities,” it said. “A June 30 order from a federal judge that the state accelerate payments owed to Medicaid managed care organizations and service providers cast doubt on the state’s immediate ability to keep up with its statutory pension contribution schedule while also meeting obligations for debt service, payroll and school funding.”

The Illinois House has scheduled a vote Thursday afternoon on potential overrides of Gov. Bruce Rauner’s vetoes of the tax increase and $36.5 billion budget.

Rauner vetoed the measures because he said the General Assembly did not address the vital structural reforms, including cutting spending and pension reform, that he says are necessary to improve Illinois’ fiscal condition and jumpstart its stagnant economy.

Under House Speaker Michael Madigan’s tax increase plan, income taxes would go up by 32 percent and corporate taxes by 33 percent.

 

Fifteen Republicans voted in favor of the tax increases in the initial vote on Sunday. Several of them, as well as many Democrats, said they were voting for the budget and tax increase precisely to avoid a junk credit rating.

Rep. David McSweeney, R-Barrington Hills, was not among them. He said the warning from Moodys today is proof that the tax increases are a horrible idea.

“It’s a junk budget and a junk tax increase,” McSweeney said. “Moodys is telling us the Madigan tax increase is a sham.”

Mark Glennon, founder of financial newsletter WirePoints and a venture capitalist, said Moodys understands Illinois’ problems are far deeper than a short-term cash crisis.

“The budget deficit is two to three times larger than officially reported. Moody’s surely recognizes that there are massive problems that remain unaddressed by the new budget and the tax increase,” Glennon said. “Those two measures may or may not solve the very near term cash crunch, but they don’t remotely come close to addressing the longer-term issues.”

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