With Illinois facing financial duress on several fronts, Moody’s Investors Service on Monday suggested that even if officials reinstate an income tax increase that was allowed to sunset in January it won’t be enough to plug a $5 billion budget hole.
An income tax increase alone would only bring in about $2.4 billion; not enough to sufficiently address an anticipated $5 billion deficit, a report by the major ratings agency stated.
A report by Moody’s stressed that passing a budget was not Illinois’ biggest problem. The larger issue was creating a revenue stream and finding a way to tackle pension debt — a mammoth problem that has taken a backseat to the state’s budget impasse.
The report stated that in addition to increasing individual income tax rates to 4.75 percent from 3.75 percent and corporate rates to 6.75 percent from 5.25 percent, Illinois would still have to cut $1.7 billion in spending and find even more new revenue for the remaining $500 million.
“We’re looking at a narrowing window of opportunity for the state to implement the budgetary action to achieve balance,” said Ted Hampton, a Moody’s analyst in charge of Illinois.
“The state has gotten bogged down in trying to figure out fiscal (year) 16 and, as a consequence, that has distracted legislators and the governor’s staff presumably, to some degree, to finding solutions to the funding crisis.”
The report acknowledges the suggested cuts, while half of what Gov. Bruce Rauner laid out in his February budget proposal, are particularly politically unpalatable because the reductions would need to come in greater monthly increments, rather than spread out over the year.
Rauner, a Republican, strenuously campaigned against the income tax increase, first approved under Gov. Pat Quinn. He urged Democrats not to extend the temporary tax hike and Democrats, despite having a supermajority, allowed it to expire in January.
Illinois has the worst-funded pension system in the nation. The liability is eating up about 24 percent of the state’s budget, Moody’s said. Couple that with the expiration of an income tax increase earlier this year, and Illinois may soon spiral into the deep red. Supreme Court rulings have solidified protections of retiree pension payments and health care benefits, the report said.
“Continued political gridlock and the inability to reach an agreement by late September, the end of the state’s fiscal first quarter, will greatly increase the likelihood of the deficit moving from projected to actual,” the report states.
Rauner and the Democratic-controlled Legislature remain at loggerheads over a budget, which the governor has conditioned on the passage of his turnaround agenda. Democrats have rejected the agenda, saying much of it goes against their core party principles.
Rauner vetoed a budget sent to him by Democrats, saying it was out of balance. While powerful House Speaker Michael Madigan, D-Chicago, has said he supports a balance of cuts and new revenue, Rauner remains steadfast against agreeing to new taxes unless he gets items on his agenda passed.