- S&P, Fitch say action over weekend marks positive development
- State bonds at risk of losing investment grade without budget
Illinois lawmakers moved toward ending a record-long budget impasse, increasing optimism that the government will enact a spending plan and avoid becoming the first junk-rated U.S. state.
The Senate’s Democratic president, John Cullerton, plans to hold a vote Tuesday on a $36 billion spending plan and package of tax increases that was passed Sunday by the House of Representatives. The bills, which passed with a veto-proof majority because of support from Republicans, need to clear the Senate before they can be sent to Republican Governor Bruce Rauner, who has vowed to veto the tax hike.
The action signals will from lawmakers in both parties to break a stalemate that’s threatening to turn Illinois into the only U.S. state with a junk-bond rating. Both S&P Global Ratings and Fitch Ratings said the package of measures being put together by the Democrat-led legislature marked a positive shift toward repairing the state’s battered finances.
“It’s been a political crisis, an unprecedented stalemate for over two years now and yesterday’s action was really the first break in that stalemate,” John Miller, co-head of fixed income at Nuveen Asset Management, said in an interview on Bloomberg Television. “We think they keep their investment grade ratings even though there’s still a lot of work to be done.”
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John Miller, Nuveen Investments co-head of fixed income, discusses the Illinois budget impasse.
Illinois has entered its third year without a budget because of a clash between the Republican governor and lawmakers over how to close the government’s chronic deficits. Unpaid bills have soared to a record $15 billion, and by August the state is set to run out of money for key expenses for the first time since the stalemate began, according to Comptroller Susana Mendoza, a Democrat. That means school funding, state payroll and pension payments could be affected.
The measures that were passed by the House are similar to ones the Senate approved in May, before a three-fifths majority was needed to do so. Passing the tax hike with only votes from his party would be “very difficult,” Cullerton told reporters on Monday.
As part of its budget plan, the House passed a bill Monday that includes about $8 billion to help pay down the backlog of unpaid bills, in part by issuing bonds. That measure also needs Senate concurrence.
On June 1, S&P and Moody’s Investors Service both dropped the state’s rating to one level above junk. S&P has said that without a spending plan that addresses the deficit around July 1 — the start of the new budget year — Illinois would likely get downgraded again. That would make it the first state on record to lose investment-grade status.
On Monday, Fitch called the weekend developments “concrete progress,” noting that it appears the legislature may have enough votes to override Rauner’s planned veto of the tax hike. S&P called the actions a “meaningful step.”
Yields on the state’s 10-year bonds have soared to 4.8 percent, 2.8 percentage points more than those of benchmark debt. That’s the highest yield of all 22 states that Bloomberg tracks.
In his statement announcing his planned veto of the tax increase, Rauner criticized lawmakers for continuing “out of balance budgets with no real reform,” blaming House Speaker Michael Madigan, a Democrat who controls much of the legislative agenda. The House bill would raise individual income taxes from 3.75 percent to 4.95 percent and corporate levies from 5.25 percent to 7 percent.
Rauner, who in 2015 became the first Republican to lead the state in more than a decade, wants any spending plan to include some of the agenda that he says he was elected to enact: a property-tax freeze, legislative term limits and changes to the workers’ compensation insurance system to cut costs for businesses. Democrats, led by Madigan, have resisted, saying those changes would hurt the middle class. While those legislators say they’ve passed some of Rauner’s items, the governor says they haven’t gone far enough.
The fiscal pressure intensified on Friday after a U.S. federal judge ruled that the state must boost its Medicaid-related payments to chip away at the backlog of unpaid bills.
Comptroller Mendoza said the ruling brings Illinois’s finances “from horrific to catastrophic.” She said while bond payments will continue “uninterrupted,” payments to pensions, state payroll, schools and local governments will likely have to be reduced.
The state’s progress helps move Illinois away from the potential downgrade, said Gabe Diederich, a Menomonee Falls, Wisconsin-based portfolio manager at Wells Fargo Asset Management, which manages about $40 billion of municipals, including Illinois.
“This is constructive enough to get them to pause,” Diederich said, referring to the rating companies. “But you still have a long way to go in terms of removing the exceptional yield penalty the state pays in the market because of its financial management.”