Post by macrockett on May 4, 2010 19:44:00 GMT -6
Gek, meet structural budget deficits....see table 3 of this document (one of many organizations pointing out the structural deficits): www.ctbaonline.org/All%20Links%20....t%201.29.07.pdf
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If that doesn't get you up to speed on why there will be constant pressure on school funding, in the State's own words:
www2.illinois.gov/budget/Pages/BudgetBasics.aspx
Illinois faces a budget shortfall of more than $11 billion. This represents nearly one-third of our tax-funded spending, or the General Revenue Fund (GRF). Our budget is hindered by the STRUCTURAL DEFICIT. Without substantial changes in spending or revenues—or both—the fiscal mess will only get worse.
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Even the U of I recognizes the problem for what it is...structural
igpa.uillinois.edu/IR_2010/budget_crisis.php
The current recession has affected every state in the union, but particularly those states with pre-existing budget problems. Worldwide economic difficulties have exposed a budget crisis in Illinois that has its roots in past decades, specifically in the continual decision to use short-term strategies to deal with a long-term structural deficit.
The growth rate of spending in Illinois surpasses the growth rate of state revenue.
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Illinois Policy Institute: www.illinoispolicy.org/news/article.asp?ArticleSource=2475
Fact: Illinois cannot continue on a path of spending more than it collects.
Leaders of the General Assembly and successive governors have demonstrated year after year that they lack the discipline to set priorities and rein in spending. Each year they have expanded government obligations to unsustainable levels. These expansions of state government obligations create structural overspending, in turn leading to so-called structural deficits.
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Most recent credit report on Illinois that I am aware of:
Fitch Downgrades Illinois' GO Bonds to 'A-'; Remains on Watch Negative
businesswire
Topics:Upgrades & Downgrades
Press Release Source: Fitch Ratings On Monday March 29, 2010, 5:12 pm EDT
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating and placed on Rating Watch Negative $1.056 billion of State of Illinois general obligation (GO) taxable bonds as follows:
--$300 million taxable Build America Bonds, series 2010-2;
--$56 million taxable series of March 2010;
--$700 million taxable Build America Bonds, series 2010-3.
In addition, Fitch has downgraded the rating on $23.4 billion GO bonds of the State of Illinois to 'A-' from 'A' and maintained the Rating Watch Negative. In addition, the ratings related to the state based on its appropriation are downgraded from 'A-' to 'BBB+' as noted at the end of this commentary.
Fitch will recalibrate the ratings on the above referenced bonds on April 5, 2010 as described in the March 25, 2010 report 'Recalibration of U.S. Public Finance Ratings', available at 'www.fitchratings.com'. At that time the ratings will be revised as described below.
--The rating on the GO bonds will be revised to 'A+', Rating Watch Negative.
--The rating on the appropriations backed bonds will be revised to 'A', Rating Watch Negative.
The taxable Build America Bonds, series 2010-2 and the taxable series of March 2010 are expected to sell via competitive bid on April 6. The taxable Build America Bonds, series 2010-3 are expected to sell via negotiation on April 20.
RATING RATIONALE:
--The rating downgrade reflects the magnitude and persistent nature of the state's fiscal problems and the likelihood that the budget to be enacted for fiscal year (FY) 2011 will not sufficiently address either the annual operating deficit or accumulated liabilities. Accounts payable are expected to remain high throughout the next fiscal year and the state expects to use additional deficit borrowing to close its projected budget gap.
--The Rating Watch Negative will be resolved after an assessment of the extent to which the state addresses its funding imbalances in the context of the current legislative session and the further development of a budget for FY 2011.
--Despite issuing a total of $2.25 billion in short-term notes (in June and August), the state's accounts payable backlog is projected to increase by $2 billion to $6.1 billion by the end of the fiscal year, equal to 22% of general fund resources. The state continues to manage its budgetary deficit by deferring payments to vendors and others.
--The state benefits from a large, diverse economy centered on the Chicago metropolitan area, which is the nation's third largest and is a nationally important business and transportation center. Illinois entered the recession later than the national average and is likely to emerge later as well.
--The state's debt burden is rising and additional borrowing, some of which will be supported by new revenues, is expected under the recently authorized a $31 billion capital plan and with the $4.7 billion in borrowing expected to close the projected FY 2011 budget gap.
--There is a large unfunded pension liability, despite the issuance of pension obligation bonds. The state passed bipartisan comprehensive pension reform (March 2010), which should lower its future pension liability but is not likely to have a significant near-term affect on financial operations. Nevertheless, taking action on this longstanding issue is a credit positive. DON'T BELIEVE IT!
WHAT COULD TRIGGER A DOWNGRADE:
--Failure to enact budgetary measures that reduce the deficit on an ongoing basis.
--Failure to address the cumulative budget deficit and reduce the accounts payable balance.
SECURITY:
Direct general obligation, full faith and credit of the state of Illinois.
CREDIT SUMMARY:
The state's rating was downgraded to 'A' from 'AA-' in July 2009, at which time Fitch noted the significant scope of the state's budgetary problem and its failure to enact a budget that fully addressed current spending needs and a large structural budget deficit. The fiscal situation has deteriorated since the start of the fiscal year in July, both due to a decline in economically sensitive revenues as well as the inability of the state to implement important elements of its budget, triggering the assignment of the Rating Watch Negative in December 2009. The downgrade at this time, from 'A' to 'A-' reflects the increasing likelihood that sufficient solutions will not be implemented in the FY 2011 budget. The state is facing a growing budget deficit, soaring accounts payables, and a significant structural gap for which solutions have been difficult to identify and implement.
Illinois entered this economic cycle with little financial flexibility to handle a downturn. It came out of the last recession relatively late and did not take actions to build its reserves or restructure its finances as its economy and the national economy grew over the five years leading into this recession. While the extent of the current fiscal problem was clear midway through FY 2009 as revenue estimates were downsized, comprehensive solutions have been repeatedly delayed. Faced with reduced revenues and an aversion to broad based tax increases, the FY 2010 enacted budget relies heavily on non-recurring revenues, particularly the use of debt to finance current operations. Since the start of the current fiscal year, declining revenues and an inability to achieve enacted budget solutions has contributed to a $2 billion gap (7% of general fund resources) opening in the FY 2010 budget, for which there are no solutions currently proposed other than to delay payments to vendors and schools districts and other entities that rely on state payments. Taking into account the pension payment that was effectively covered by a $3.5 billion GO issuance rather than general fund resources, the budgetary deficit has grown to over $5.5 billion, 20% of general fund resources. The cumulative deficit, which includes the carry over of $3.95 billion in prior year deficits, is now projected to be $9.3 billion, or 33% of general fund resources.
Fitch indicated in December 2009 that future rating action would be taken if the state did not address its operating deficit, its growing structural deficit, and its accumulated liabilities in a comprehensive way in the context of its FY 2011 budget. It appears now that budget solutions will continue to be pushed out to the future, budgetary balance will continue to rely on sizeable borrowing, and those reliant on state payments will continue to have long waits to be paid. While the proposed budget for FY 2011 does include $2 billion in spending cuts, it leaves a $4.7 billion funding gap (17% of FY 2011 expected revenues) that is expected to be closed by issuing bonds, and carries over $6 billion in accounts payable through another fiscal year. The budget assumed no broad-based revenue increase; however, the Governor has asked the legislature to enact a 1% surcharge on the personal and corporate income tax rates, the revenues of which would be used to restore the proposed spending cuts to education ($1.2 billion) with the balance ($1.8 billion) being used to reduce accounts payable associated with education.
The state's general fund cash position is weak and the state is increasingly relying on short-term borrowing and deferring vendor payments to provide liquidity. Accounts payable at the end of the 2009 fiscal year were approximately $3.9 billion, equal to more than a three-month delay in payments. This compares to June 30, 2008, when there was $975 million in accounts payable. The state marketed $1 billion of GO notes in May and $1.25 billion of GO notes in August (both rated 'F1' by Fitch), which provided a partial solution to its short-term funding needs; however, accounts payable have again increased to over $4 billion as of February, and are expected to increase to $6 billion once the short-term borrowing is repaid. There are large cash balances, reported at $6 billion, in other state funds that now marginally exceed the current payables; any inter-fund borrowing or budget transfers would require legislative approval.
The state's net tax-supported debt is increasing and is now 5.3% of 2008 personal income. The additional borrowing assumed in the executive budget proposal will push the ratio above 6%. Further, the state's $31 billion capital plan will include significant borrowing, most of which would be backed by new revenue sources, including gaming revenues, and vehicle fees. The current offerings will fund school construction and transportation projects.
Longer term challenges remain, in particular, continued significant growth in funding requirements to address the pension systems' large unfunded liabilities. As of June 30, 2009, the unfunded accrued actuarial liability was reported at $62.4 billion, resulting in a 50.6% funded ratio, a level which reflects the use of five-year smoothing for the first time. It is expected that the recent passage of comprehensive pension reform, on March 24, 2010, which establishes a two-tier pension system for public employees, raises the retirement age, and scales back growth in benefits, will significantly reduce the state's future liabilities. The state's ability to address what has been a long-standing credit weakness and on-going funding challenge is a credit positive.
The Illinois economy is centered on the Chicago metropolitan area, which is the nation's third largest and a nationally important business and transportation center. Illinois' economy has gradually shifted, similarly to the U.S. in general, away from manufacturing to professional and business services. The remaining manufacturing sector includes more resilient non-durables, and is less concentrated in the auto sector than are surrounding states (Indiana, Michigan, and Ohio). While the state economy has not been as negatively affected by the recession as some of these neighboring Midwestern states, it did contract faster than the national economy. Total non-farm employment declined 4.9% in 2009, versus the national rate of 4.3%, and year-over-year job losses January 2010 were 3.9%, versus the national contraction of 3%. January unemployment of 11.3% exceeded the national rate of 9.7% and it continues to increase while the national rate has started to decline. Wealth levels remain high. Per capita income is 105% of the national average, 14th among the states.
The 'A-' ratings on the following bonds, which are based on the state's appropriation, are downgraded to 'BBB+', Negative Watch.
--Illinois Sports Facilities Authority, sports facilities bonds (state tax supported) series 2001;
--Chicago motor fuel tax revenue bonds, series 2003A, series 2008A, series 2008B;
These ratings will be recalibrated to 'A', Negative Watch on April 5, 2010, as noted above.
Please see report dated Feb. 4, 2010 for more information on the State of Illinois.
Applicable criteria available on Fitch's website at http://www.fitchratings.com:
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009.
--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
Additional information is available at www.fitchratings.com.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.