Bonds

Illinois holds fiscal 2024 forecast steady even as April revenues tank

Illinois trimmed its revenue estimates for the current fiscal year and must absorb higher social services expenses next year, leaving less room to maneuver as lawmakers finalize a supplemental spending package and new budget.

They’re entering the homestretch of their spring session that’s slated to end May 19 with passage of a fiscal 2024 budget the top priority. The April plunge in revenues complicates the budget picture but the state still expects to close out the fiscal year with a surplus and projections remain on track in the coming fiscal year.

Illinois revenues sunk in April by $1.8 billion from April 2022 collections — a trend seen in other states — leading both the Governor’s Office of Management and Budget and the legislature’s Commission on Government Forecasting and Accountability to trim revenue estimates for the current fiscal year that ends June 30.  

The governor’s budget office in a report to the Legislative Budget Oversight Commission this week cut this year’s revenue projections by $616 million to $50.7 billion after April revenues fell $849 million below the budgeted level while COGFA cut its estimate $728 million to $51.2 billion.

The latest estimates abruptly reversed the upward revision COGFA had made of $575 million two months ago, which had prompted talk of possible tax relief. Spending through April is also up by $319 million from budgeted levels, according to the governor’s budget office.

The new fiscal 2023 estimates raise questions over Gov. J.B. Pritzker’s nearly $800 million proposed supplemental spending plans for the current year surplus, which would make an additional $200 million supplemental pension contribution beyond the $9.8 billion set in statute. Additional pension contributions over the last two budget cycles along with a rebuilding of the state’s rainy day fund helped draw several rounds of rating upgrades.

Pritzker kept those supplemental budget measures on the table this week.

“The good news is that the amount we are talking about is a very small percentage of the overall entire budget,” around 1%, and “knowing that this might be coming we’ve ramped down some of the spending here and there” among agencies to ensure that the revenue drop could be absorbed, Pritzker said Thursday.

While revenues are faltering late in the current fiscal year, the governor’s budget office lifted its projections for the coming fiscal year by $532 million to $50.5 billion, moving it closer in alignment to COGFA which said in its latest revenue monthly report that it would hold steady with its 2024 estimate of $50.4 billion.

The state also must absorb an additional $880 million in higher-than-expected costs on healthcare for non-citizens.  

Pritzker said decisions on how to address it are up to the General Assembly but the administration has offered options such as implementing co-pays or shifting reimbursement rates to defray costs.

“These are all things that I think are reasonable to consider,” he said.

The proposed budget puts $50 million toward further paying down the state’s accounts payable.

It would also send another $138 million from the anticipated $303 million fiscal 2024 ending balance to the rainy-day fund that is on track to hit $2 billion at the end of fiscal 2024 if the state stays on track with proposed fiscal 2023 infusions.

A $350 million deposit last month lifted the rainy day fund to a peak of $1.58 billion and the accounts payable fell below $1 billion for the first time in 15 years, state Comptroller Susana Mendoza said.

Fitch weighed in on states’ April revenue plunge in a brief report on Thursday.

“Most U.S. states are still on track to meet or exceed year-end budget forecasts due to a combination of conservative revenue forecasting and continued growth in other categories of state taxes,” Fitch said.

“Many states used prior-year revenue surpluses to improve financial resilience by boosting reserves and paying down debt, supporting state ratings stability,” its analysts wrote.

Despite April tax revenue declines Illinois is among the states that is still “on track to comfortably exceed their adopted budget revenue forecasts, which anticipated tax revenue declines for the full fiscal year,” Fitch said. Most states are cautious in their revenue forecasts as they adopt fiscal 2024 budget plans.

With the April revision, COGFA noted that Illinois revenues are still up $132 million from last year but that counts $325 million of one-time federal American Relief Plan Act funding that won’t be available in the coming fiscal year.

The Chicago Civic Federation endorsed the proposed budget in a report published Thursday, but also raised concerns on the long term impact of some new spending.

“Increases to the state’s rainy day fund and fewer outstanding liabilities are noteworthy improvements,” the federation’s acting president, Sarah Wetmore, said. “Prudent management of funds places the state in a better position to handle future economic instability while at the same time supporting future growth.”  

The federation supports directing more funding toward the state’s higher education financial aid program and for education but urged caution on $2.7 billion of increased agency spending.

“Weakening revenue projections for FY2024 both here in Illinois and in states across the country should serve as a warning to state policymakers, and all proposed increases in recurring agency spending should be closely evaluated to ensure long-term sustainability,” Wetmore said.

Illinois’ healthier fiscal landscape, which has lifted its ratings to the single-A category from the triple-B-minus level, has boosted the state’s position with investors and boosted municipals in general, according to investment management firm VanEck.

“Long known as the weakest state, initiatives under Governor Pritzker’s leadership have put the state on a stronger path. As one of five states whose political subdivisions issue the most municipal bonds year over year, Illinois’ recent improvements are significant and welcome news for the asset class. These developments demonstrate that the credit quality of municipals will likely remain healthy,” Tamara Lowin, senior municipal credit analyst at VanEck, wrote in a commentary.

Ongoing progress on pensions, however, will “take consistent discipline” but “to us, the overarching theme is ‘willingness’: a virtue the state has struggled with in the past. Now we see excess funds saved instead of spent, a focus on balanced spending, and long-term planning,” Lowin wrote.

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