Illinois Budget Deal Would Leave Many Problems Unaddressed -- Update

By Quint Forgey and Heather Gillers Features Dow Jones Newswires

Illinois's Democratic legislature appears to have forged a budget deal that could stave off a junk credit rating and resolve a two-year fiscal standoff, but the plan appears to do little to solve the state's long-term problems.

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Indeed, a major rating firm said Wednesday that it continues to look at a possible downgrade of the state's credit rating to a level no state has ever seen.

On Thursday, the state House is expected to join the Senate in overriding a veto by Republican Gov. Bruce Rauner, a crushing defeat for the billionaire first-term governor who vowed to break the status quo in Illinois.

Democratic House Speaker Michael Madigan, the governor's chief political opponent, passed the revenue measure this weekend with 72 votes, surpassing the three-fifths-majority threshold of 71 votes required to override a gubernatorial veto.

Ahead of Thursday's vote, the focus remains on 15 House Republicans who voted Sunday to approve a $5 billion permanent income tax increase to fund a more than $36 billion spending bill. The state brings in roughly $32 billion a year.

Mr. Rauner, who vetoed the measure because he opposed making the tax increase permanent, is still seeking certain concessions from the legislature, including a property-tax freeze and a revamp of the state's worker compensation system.

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"Do not push for a tax hike with no fundamental reforms. Don't do it," the governor said at a news conference Wednesday. "This income tax hike is booby-trapped. It's got land mines all over it."

A budget wouldn't be a panacea. Illinois is struggling under the weight of $250 billion in pension debt, according to an estimate by Moody's Investors Service, a liability far greater than any other state's. The state's own estimate is about $126.5 billion, based on more optimistic investment assumptions.

The burdensome backlog of nearly $15 billion in bills left over from two years without a budget will likely leave Illinois "vulnerable to unanticipated economic stress," S&P Global Inc. noted Monday. Last week, a federal judge found Illinois noncompliant with its Medicaid payments, with the state owing $3 billion to health-care providers.

And Moody's Investors Service on Wednesday said that it was officially placing Illinois's rating on review for a possible downgrade, even after factoring in the likely vote by the House of Representatives to override Gov. Rauner's veto on a tax hike and move forward on a budget.

"Despite the progress toward budget balance that the emerging fiscal plan embodies, the plan entails substantial implementation risk," said Moody's. "The plan... appears to lack broad bipartisan support, which may signal shortcomings in its effectiveness once implemented."

"One budget is not going to fix their pension liabilities," said Keith Brainard, research director at the National Association of State Retirement Administrators. "The pension hole that the state has dug itself took decades and it's going to take a long time to get out of that hole."

Laurence Msall, president of the Civic Federation, a nonpartisan Chicago-based government-watchdog group backed by business leaders, said there are really only a few ways for the state to solve its pension problems. Illinois would need a constitutional amendment that would allow the state to reduce the liability or a means of bringing in enough revenue to cover state operations and pay off pension debts over time.

"It would be a great improvement to have any type of budget framework," Mr. Msall said. "However that will not be the end of Illinois' financial crisis."

Don Rose, a political consultant, said the General Assembly must continue to pursue pension reform and explore the possibility of changes to the state's constitution.

"It's going to be a slow process," Mr. Rose said "This [budget] is not a cure-all. We've got to find longer-term solutions, revenue-based."

But if Thursday's House vote to override the governor is successful, Mr. Rauner will have been dealt a stinging legislative rebuke ahead of a planned re-election race in 2018.

"This presents a unique opportunity for the governor because either he can mobilize all of the angst among taxpayers...and that could potentially propel him to re-election," said Diana Rickert, vice president of communications for the Illinois Policy Institute, a conservative-leaning think tank. "Or he's going to be meek and not say anything and be like, 'I tried, I failed, they're blocking me.' This is really a defining moment in the governor's political career."

Write to Quint Forgey at quint.forgey@dowjones.comHeather Gillers at heather.gillers@wsj.com

(END) Dow Jones Newswires

July 05, 2017 17:33 ET (21:33 GMT)