Fitch: Approval of graduated income tax ‘critical’ to state’s credit position — and pensions remain a mess

A Wall Street credit rating agency on Monday said approval of Illinois’ graduated income tax referendum on the November ballot will be “critical” to the state’s credit outlook.

Gov. J.B. Pritzker’s budget proposal, unveiled last month, would put nearly $1.4 billion in reserves, including funding for education — unless his preferred graduated income tax amendment passes.

Fitch Ratings says under Pritzker’s budget proposal, “failure of the income tax amendment would trigger fiscal actions that could exacerbate the state’s structural budget challenges and pressure local governments, including school districts.”

The rating agency says the state’s credit will be heavily impacted by whether or not voters approve the graduated income tax amendment come November.

“If the amendment fails[,] some of the governor’s proposals, including deferral of up [to] $400 million in employee health insurance costs and more than $500 million of interfund transfers or borrowings, would risk exacerbating the state’s structural budget challenges,” Fitch writes. “If voters approve the constitutional amendment the governor’s executive budget would avoid such non-recurring measures and appears to continue recent progress towards structural balance.”

The state’s top fiscal problem remains its long-term liabilities; Fitch estimated those at $200 billion, with pensions accounting for 80% of that total.

The state retains a BBB rating, reflecting “an ongoing pattern of weak operating performance and irresolute fiscal decision-making that has produced a credit position well below the state’s broad economic base and substantial independent legal ability to control its budget would otherwise support,” Fitch write. “The state’s elevated long-term liability position remains a key credit challenge.”

Fitch warns the state’s pension mess “remain a point of structural weakness for the state, regardless of the income tax amendment vote.”

The state’s pension structure is still shorting the actuarially determined contributions, and Fitch warns full contributions will be crucial to getting a structural balance.

Fitch notes the state’s actual pension contributions totaled about $7.7 billion, which is 71% of what the state should be paying. That’s a gap of more than $2 billion.

But the agency notes that the $100 to $200 million proposed by Pritzker to go towards pensions, should the amendment pass, “would be helpful.”

“But on their own, they would not materially affect Fitch’s view that the state’s budget remains structurally unbalanced given the sizable gap between actual contributions,” and the actuarially determined contributions.

The agency also sounds the alarm on Pritzker’s holding of money for schools, included in a “reserve” the governor said he’d release should the amendment pass.

“For local governments, and particularly school districts, the $1.4 billion of reserved items in the governor’s budget proposal pose risks,” the agency said.”

In July, Fitch upgraded Illinois’ credit outlook from negative to stable, citing an unexpected revenue bump in April and a “plausible and achievable 2020 budget plan.” Fitch Ratings said last year’s budget left the state “better positioned from a fiscal perspective, and the potential for a rating downgrade in the near-term has receded.”

But the rating agency warns that gains were “somewhat tenuous” and sustainability relied on what the state enacted in the next several years, including the graduated income tax ballot referendum.