Jim Dey | When it comes to state's finances, read the fine print

Jim Dey | When it comes to state's finances, read the fine print

When it comes to reviewing the state of Illinois' finances, be skeptical of what politicians have to say.

They — no matter their party or political perspective — have a motive to shade or exaggerate the truth.

Those who want the straight dope need to listen to the money men, guys like Eric Kim from Fitch Ratings service.

So, Eric, what's the financial state of the state?

"We have a BBB (two notches above a junk bond) rating with a negative outlook," said Kim, who earlier this week released a lengthy re-examination of the state's finances.

Gee, that doesn't sound encouraging. How does that compare to the other 40-plus states that Fitch reviews?

"In terms of ratings, Illinois is the lowest-rated U.S. state," Kim said.

Yes, nobody knows what troubles the Land of Lincoln has seen/is seeing because no other state has over the past 15 to 20 years presided over a financial clown show comparable to that of Illinois.

But hope springs eternal for positive change. Democratic Gov.-elect J.B. Pritzker is waiting in the wings. The multibillionaire heir to a family fortune is positively drooling to put his policy stamp on this state.

At the same time, the state has an overwhelmingly Democratic House and Senate, whose members are drooling as sloppily as Pritzker in anticipation of getting to work.

That's good, the Fitch report states, in the sense that the political gridlock that marked the relationship between Republican Gov. Bruce Rauner and Democratic House Speaker Michael Madigan will be a thing of the past.

"... this will make it unlikely the state will repeat its more-than-two-year stretch without an enacted budget between July 2015 and July 2017," the report states.

At the same time, agreement between Pritzker and the Democratic Legislature is no guarantee they will adopt policies that will lift Illinois out of its effective bankruptcy.

"Between 2003 and 2014, the state operated under single-party control. ... Over that span, the state's credit quality deteriorated considerably," the Fitch report states.

Obviously, what matters is the quality of financial decision-making going forward.

Will the governor and Legislature make the same mistakes in the future — spending far more than the state takes in, ignoring monstrous pension problems — as they have in the past? Or are they ready to step up to the plate and get serious?

Kim said Illinois' revenue, spending and long-term liabilities are manageable, but they have to be properly managed. Or, in his words, the state's "operating performance" must be sound.

"That is where Illinois' credit quality suffers most," he said.

Referring to the two-year budget standoff between Rauner and Madigan, Kim described it as "the epitome of not making fiscal decisions" that dearly cost the state.

That's why if the economy goes south, the report states, "Illinois remains poorly positioned to address" the negative fallout.

Why? Because it has no rainy-day fund. Instead, it has debts in the form of budget deficits, $130 billion pension debts and $6.6 billion in unpaid bills owed to nearly 74,000 entities.

"Absent robust and sustained budgetary improvement and a commitment to addressing the backlog, Illinois will maintain an accounts-payable balance into the foreseeable future," the report states.

Fitch reports that Illinois has a "strong economic base," particularly in Chicago, but that its overall economy has "grown only tepidly since the end of the Great Recession."

"Demographic trends imply future growth may also remain subdued. The state's population has been essentially flat since 2010, while the nation has increased more than 5 percent," the report states.

Pritzker has talked only generally about reducing the size and cost of state government. But he has boldly called for a state income-tax increase through a progressive-income-tax amendment to the Illinois Constitution. He also has embraced plans for aggressive spending on social-service programs as well as infrastructure improvements.

"... firm policy plans have yet to be articulated," Fitch states.

One potential proposal, backed by the Center on Tax and Budget Accountability, calls for issuing pension-obligation bonds to pay for stepped-up payments to the state's underfunded pensions.

That's an example of the "operating performance" issue that Kim cited. He's less than impressed by borrowing to raise money needed to pay debts.

"Fitch has previously noted that issuance of POBs is generally neutral to negative for an issuer's credit quality. If POB proceeds are deposited with a pension trust, while actuarial contributions continue to flow uninterrupted from annual budgetary resources, the issuance of POBs offsets unfunded liability and has little immediate impact on the issuer's long-term liability burden," the report states.

On the other hand, using bond "proceeds for budget relief by offsetting an annual pension contribution" is "deficit financing" that "may negatively weigh on the credit ratings."

This is green-eyeshade stuff, understood mostly by people who have a handle on public finance.

But it's not so complicated that regular people can't get the basics. If Illinois is to avoid falling deeper into the financial gutter — the junk-bond status once reached under Rauner — it has to get its house in order.

That means balancing budgets, limiting spending increases, paying debts and enhancing revenues through solid economic growth and/or tax increases.

Kim's Fitch report thoroughly outlined the problem and the possibilities in its exhausting report.

As to suggestions on how to proceed, Kim had no comment.

"Well, that's a policy. We don't do policy," he said.

Jim Dey, a member of The News-Gazette staff, can be reached at jdey@news-gazette.com or 217-351-5369.

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