Illinois headed into the new fiscal year with fresh deposits to its rainy-day and pension stabilization funds, a low bill balance, and $1 billion in available general revenue funds — hitting several high marks on some fiscal metrics that had sunk during the state’s budget impasse six years ago.
The state ended the year with a $1 billion general revenue fund balance for the first time since 1999, state Comptroller Susana Mendoza said Friday in a fiscal year-end announcement. Signs suggest the state has headed into fiscal 2024 “on a high note,” she said.
Mendoza will highlight the numbers tracked closely by investors and rating agencies as a barometer of the state’s fiscal health at meetings next week with ratings agencies.
A $200 million deposit into the state’s once-depleted rainy-day fund, formally known as the budget stabilization fund, brought it to a peak of $1.94 billion and is on course to top the $2 billion mark in the new fiscal year under the budget signed by Gov. J.B. Pritzker.
The budget also leaves intact the statutory allocations from various sources that amount to a $138 million deposit into the rainy-day fund in the current fiscal year.
The fund received an infusion of $746 million in fiscal 2022 and $1.18 billion of deposits were made in fiscal 2023.
“Just six years ago our state had nearly nothing in our rainy-day fund, $17 billion in unpaid bills, and had suffered eight credit downgrades,” Pritzker said in a statement last week. “Today, we have no bill backlog, a $2 billion rainy-day fund, and eight credit upgrades.”
The upcoming fiscal 2024 infusion comes from statutory measures put in place in the fiscal 2023 budget that includes a $45 million annual repayment of a $450 million state loan to the unemployment trust fund, 10% of cannabis revenues and a monthly transfer of $3.75 million that begins July 1. The state is also raising its targeted balance to 7.5% of general fund revenues from 5%.
The general fund budget spends $50.6 billion of $50.7 billion in expected revenues.
A planned $200 million deposit into the pension stabilization fund, which goes to supplement the state’s roughly $10 billion annual statutory contributions, was made Friday, bringing the additional pension payments made to $700 million. The state put $200 million toward the fund earlier in fiscal 2023 and $300 million in fiscal 2022 as the result of budget surpluses.
“One of the most important things state leaders did this year was to resist spending this additional revenue on new programs — the better long-term approach is to save and prepare the state for potential downturns in the future,” Mendoza said.
The state also closed out the fiscal year with just $528 million of bills to be paid and is fully caught up for a second year in a row on vouchers owed to Medicaid, group health insurance, elementary and high schools, higher education and other government operations and programs. Most of the bills still to be paid are reported by the state agencies and have not yet been submitted to the comptroller.
The accounts payable tab, formerly known as the bill backlog, had hit a peak of $16.7 billion during the budget impasse, and it featured prominently in rating agency critiques as a sign of the state’s strained liquidity.
On Friday, the comptroller’s office also made the $200 million fourth quarter mandated categorical grant payment to transportation and special education funds on time. At the height of the impasse, those payments were delayed by six months.
While the rainy-day fund will peak over $2 billion this year, it’s still not enough to meet recommended reserve levels, as it would cover just 10 business days of state operations while most states have sufficient reserves to cover 40 days, according to data the comptroller’s office cites from PEW Charitable Trusts. The fund held just $48,000 in 2018.
Mendoza backed Senate Bill 2443 and House Bill 2515 during the legislature’s spring session that would set automatic triggers for regular deposits into both the budget and pension stabilization funds. They failed to pick up traction, but Mendoza said she will try again in the next session.
“Credit rating agencies approve of the extra $700 million applied to pensions, but they warn Illinois needs to pay even more toward its pension funds. S&P just issued another report this week with that warning,” Mendoza said. “We must heed the advice given by the credit rating agencies that Illinois must still do more to enhance our reserves and continue to pay down our pension obligations.”
S&P Global Ratings last week warned of the state’s pensions strains — based on a statutory payment formula and amortization schedule to reach 90% funding in 2045 that fall far short of an actuarial contribution — and rising pressures as the state likely faces added costs to bring its tier 2 level of benefits for employees hired after 2010 in compliance with federal Social Security Administration rules on public benefits. The state has $139 billion of unfunded liabilities and the system is 44% funded.
“Costs will keep rising because contributions are significantly short of meaningful funding progress, plans are poorly funded, and the Illinois Pension Code allows plans to use assumptions and methodologies that defer costs,” S&P warned.
The state’s progress in building up its rainy-day fund, putting more toward pensions, and paying down debt helped drive several rounds of positive rating actions. Whether the fiscal yearend metrics are enough to draw additional positive rating actions remains to be seen as revenues are moderating and the state must contend with rising healthcare and other costs and economic uncertainty poses threats to the state’s budget.
S&P in February raised the state’s rating to A-minus with a stable outlook from BBB-plus. Moody’s Investors Service in mid-March upgraded the state to A3 and stable from Baa1.
Fitch Ratings followed in late March, lifting the state’s outlook to positive from stable on its BBB-plus rating, signaling the potential upgrade, possibly soon after passage of a fiscal 2024 budget that makes further progress on chronic fiscal strains.
“The approved fiscal 2024 budget continues some of the positive momentum in recent years, including adding to reserves and paying down liabilities with supplemental pension contributions, and debt defeasance,” Fitch’s lead Illinois analyst Eric Kim said in an email last month.
“To support an upgrade, we are looking for the state to follow through on its plans to make material improvements in fiscal resilience, primarily through building reserves to, or approaching, $2 billion or roughly 4%-5% of spending (which this budget does), while maintaining recent improvements in fiscal management through the near-term period of economic uncertainty,” Kim said.
One negative for the state is its chronically late release of its annual financial audit, which has been noted by rating agencies. The fiscal 2022 audit, which is expected by the end of summer, is overdue as the comptroller awaits final reports from the state auditor general that go into the full annual comprehensive financial report.
Mendoza did release an “interim” report earlier this year with some key fiscal measures and last month updated it.
The state’s net position came in at a negative $181.2 billion for fiscal 2022, which ended June 30, 2022. That is a $17.7 billion or 9% shift from the previous year’s position of a negative $198.9 billion. Net pension liabilities decreased $12.1 billion or 8% from fiscal 2021.
Pritzker moved late last month to rein in the rising tab for an immigrant healthcare program, amid a surge of asylum seekers arriving in Chicago over the last year, after warnings that the cost would exceed $1 billion. The final budget package ended up earmarking $550 million and gave Pritzker flexibility to make changes.
While Pritzker has faced pushback for freezing the program for new enrollees, rating agencies likely will view the move as a sign of his willingness to tighten the state’s fiscal belt when needed despite social spending pressures.
“We need to make sure that we’re living within our fiscal limits,” Pritzker said Monday when asked about the cuts at a public appearance. “That’s something that wasn’t done for a number of years in Illinois.”
The positive momentum has helped trim state spreads. The state’s 10-year and 25-year bonds are currently set by Refinitiv MMD at a 105/115 basis point spread to the AAA benchmark compared to 173/185 bps at the start of 2023 and 132/153 bps at the start of fiscal 2023 last July.