Wall Street ratings firm: COVID-19 could mean ‘long-term damage’ to already woeful Illinois finances

The coronavirus pandemic will “exacerbate the already substantial financial challenges” facing Illinois and “could inflict some long-term damage” to the state by the time it’s contained.

That’s according to a report released Tuesday by the credit ratings agency Moody’s, which earlier this month already affirmed the cash-strapped state’s rating at a notch above junk status and revised its outlook for Illinois from “stable” to “negative.”

“The negative outlook aligns with our view of the probable effects of the coronavirus pandemic, which will reduce tax collections and likely cause current-year pension investment losses, both of which would weigh more heavily on Illinois, given its existing weaknesses relative to other states,” Moody’s report states.

“Federal government support will mitigate some of the direct budgetary burden, but the state will face liquidity pressure that may lead it to near-term actions such as adding to its balance of unpaid bills. The state is also increasingly likely to take actions that worsen its long-term liabilities, in view of revenue shortfalls and growing health and social burdens.”

One potential action is an extension of Gov. J.B. Pritzker’s stay-at-home order that has ground the state economy nearly to a halt. Pritzker is expected to extend that order later this week, keeping thousands of businesses closed — though it’s not clear for how long.

The governor announced last week the crisis has blasted an estimated $2.7 billion revenue shortfall into the state’s current budget, and could wreak havoc in the next one. The state has spent nearly $177 million in its COVID-19 response so far, according to the state comptroller’s office.

While the pandemic is expected to make things worse, the key issues affecting the state’s rating have been around since long before COVID-19, according to Moody’s. Those include “extremely large unfunded pension liabilities that remain on an upward trajectory,” a “persistent backlog of bills,” and “weak governance practices that have led to pension underfunding and negative fund balances.”

“But Illinois at this point does not appear likely to suffer economic impacts markedly more severe than other large-economy states with heavily populated urban areas,” Moody’s analysts wrote.

The state could see an upgrade by enacting “recurring financial measures that support sustainable budget balance,” taking “decisive action to improve funding of the state’s main pension plans” and making “progress in lowering the bill backlog that does not rely on either long-term borrowing or on a significant decrease in non-operating fund liquidity,” according to Moody’s.

Tyler LaRiviere/Sun-Times file

Reducing pension contributions or assuming substantial liabilities from local governments could lead to a downgrade, the agency said.

And whether voters approve an amendment to the state constitution in November allowing for a graduated income tax system could have an impact, Moody’s said.

The graduated system pushed by Pritzker “would add some revenue volatility but would greatly improve flexibility to respond to pension contribution and other spending needs as well as shifting economic conditions,” Moody’s analysts wrote. “Rejection of the amendment probably will force the state to consider other alternatives, such as aggressive spending reductions, an increase in the existing flat income tax rate or application of the state sales taxes to services.”

Last week, the governor’s office projected the budget shortfall for the fiscal year that begins on July 1 could balloon from an expected $6.2 billion to $7.4 billion if Pritzker’s coveted graduated income tax proposal fails to pass.

Asked about the change in the state income tax at his briefing that day, Pritzker would only say that we need it “now more than ever.”