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 Illinois Gov. J.B. Pritzker is reportedly pushing for further
upgrades in the state’s credit rating despite pension debt growing to record
levels and persistent budget deficits during his term.
The governor traveled to New York to make his case to the three major ratings
agencies, according to Rich Miller’s Aug. 6 report in the subscriber-only
edition of the Capitol Fax blog.
Moody’s Investors Service’s upgrade on June 29 – from one notch above
non-investment grade or “junk” status to two notches above – was the state’s
first improvement in more than 20 years. S&P Global Ratings followed with an
identical upgrade on July 8. In June, the third major ratings agency, Fitch
Ratings, opted to keep Illinois just one notch above junk status, but upgraded
the state’s outlook to positive from negative.
Illinois’ credit rating remains the lowest of all 50 states.
Pritzker called the upgrades “a giant step forward to true fiscal stability” and
said his fiscal policies were the cause. But judging by the state’s own
financial projections and reporting, he is wrong. The state basically stumbled
into a small, temporary improvement thanks to cash gifts from Uncle Sam.
 Illinois’ most daunting fiscal challenges – its worst-in-the-nation pension debt
and multibillion-dollar annual structural budget deficits – are both worse than
when Pritzker took office. The Pritzker administration and the Illinois General
Assembly have yet to adopt anything close to the significant reforms necessary
to repair the state’s bleak fiscal condition.
And while the state’s backlog of unpaid bills currently sits lower than it has
in recent years – at $4.18 billion as of Aug. 16 – Illinois Policy Institute
analysis of official state forecasts shows Illinois’ short-term debt burden is
on track to reach a record $22 billion in three years. Short-term debt includes
the bill backlog, bonds sold to cover the backlog, interfund borrowing and
borrowing from the Federal Reserve.
That $22 billion of short-term debt will surpass the prior $16.7 billion record
reached during the budget impasse in 2017.
With Illinois’ deteriorating fiscal condition in mind, Pritzker’s request for
additional ratings upgrades should not be granted.
So why was Illinois’ credit upgraded in the first place? In short, thanks to a
flood of federal aid worth more than $190 billion, which propped up state
revenues and improved the state’s ability to manage cash flow in the short-term.
Credit ratings are intended to reflect the risk to investors, or the likelihood
that government bondholders will be repaid. From that perspective, an infusion
of federal aid to support Illinois’ spending might justify the recent upgrades
from Moody’s and S&P.
But while bondholders can feel more secure in their Illinois investments during
the short term, that does not translate to an improvement in the state’s
long-term financial outlook. Most importantly, Illinois residents will not
receive relief from the high tax burdens and economic stagnation perpetuated by
the state’s fiscal mismanagement until the underlying causes are addressed.
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Federal aid propping up Illinois’ finances runs out
in 2024
Shortly after the start of the COVID-19 pandemic, researchers for
the Institute of Government and Public Affairs at the University of
Illinois predicted revenue losses as high as $28.4 billion during
three budget years. According to those projections, even a short
downturn followed by a strong and fast economic recovery would
result in more than $14 billion of losses under a severe pandemic
lasting two years.
But significant revenue losses never occurred in
Illinois. In fact, state and local government revenue losses around
the country have ranged from far less than expected to nonexistent.
Governing magazine recently reported 29 states, including Illinois,
saw higher revenue collections in the 12 months after the pandemic
began than in the 12 months prior.
Moody’s Analytics, an economic forecasting firm separate from the
ratings agency, predicted in April 2020 the combined impact of
revenue losses and increased pressure on Medicaid would cause a
nationwide “fiscal shock” to states of $300 billion through fiscal
year 2022. The agency said federal support of at least that amount
would be required to prevent economically harmful spending cuts and
tax hikes in state budgets to cover the shortfall.
But federal spending to support state and local governments has far
exceeded what Moody’s Analytics said was needed.
The CARES Act provided $150 billion in state and local grants to
cover economic and public health costs related to the pandemic, and
the American Rescue Plan added another $350 billion in flexible
financial aid that could be used to cover general budget holes.
Additionally, Congress increased the federal Medicaid matching rate
by 6.2%, which will provide just over $100 billion in additional
federal funds to state budgets. The federal government spent
billions more on direct support for education, transit, election
security, and other state and local government functions that
reduced the fiscal shock.
In addition to this direct government aid, unprecedented levels of
federal support for private sector incomes and consumption – through
direct stimulus checks, enhanced unemployment benefits, the Paycheck
Protection Program and much more – meant collections from sales and
income taxes remained strong. Illinois was the fifth-largest
recipient of loans under the Paycheck Protection Program at more
than $38 billion.
As a result of federal spending, state and local tax revenues
nationwide have performed much better than many feared. Data from
the St. Louis Federal Reserve shows state and local revenues dropped
by 3% in the second quarter of 2020 but fully recovered by the third
quarter and exceeded pre-pandemic collections thereafter. |
