In a State Renowned for Its Budget Mess, Glimmers of a Turnaround

Illinois voters are used to hearing about what bad shape their state’s finances are in. Now, though, Illinois officials are painting a much different picture, one of responsible fiscal stewardship, as they head into re-election.

“For years in Illinois, they left bills unpaid, ruined our credit and racked up over $1 billion in interest penalties,” Gov. JB Pritzker, a Democrat, said in a January TV spot for his re-election campaign.

“As governor, I was determined to help fix the financial mess. Now, Illinois is keeping its promises by passing real balanced budgets,” he added. “We’re cutting costs, paying bills on time, and paying down our debt, saving taxpayers hundreds of millions of dollars. And our credit rating has been upgraded for the first time in 20 years.”

“We’re on the right track, and I’ll work every single day to keep it that way,” Pritzker said.

Pritzker and other Democrats who control the state government in Springfield are making similar pitches, not just to voters, but to bond rating agencies and critics outside the state, too.

“Our view is that the state is heading in the right direction,” said Eric Kim, the head of U.S. state ratings for Fitch Ratings, which dropped Illinois’ bond rating to a notch above junk bond status in the early days of the pandemic.

Fitch was the last of the three major bond ratings agencies to put Illinois on the cusp of junk bond status, but the other two ratings agencies increased Illinois’ bond rating last summer. The upgrades were the first time in two decades that Illinois had received better bond ratings.

If trends continue, Kim said, Fitch may upgrade its grade for Illinois bonds, too. “We’ve been seeing some positive things over the past year and a half,” he said.  

Starting in a Deep Hole

Decades of financial mismanagement have hobbled Illinois’ state finances, but the situation was bleakest five years ago. Bruce Rauner, the Republican governor at the time, tried to force the Democratic-led legislature to curb the power of labor unions before he would agree to sign a state budget. The stand off lasted more than two years, during which time Illinois hobbled along without a spending plan.

It hit almost every aspect of state operations, but especially universities and social services. The backlog of unpaid bills skyrocketed to $16.7 billion, and vendors waited six months or more to get paid. The state’s bond ratings continued to slide, almost to the point of no longer being considered investment quality. Slipping into junk bond territory would have had cascading impacts on state finances. That, along with the devastation that the impasse brought to local service providers, was a major reason a handful of Republicans joined with legislative Democrats to pass a budget over Rauner’s veto and end the impasse in 2017.

Pritzker soundly beat Rauner in the 2018 elections. A big part of Pritzker’s message was to restore competence and fiscal management in state government.

The pandemic threatened those plans. Illinois had been hit hard in the Great Recession, and, because of the budget standoff, it had virtually no reserves coming into the Covid-19 crisis. As the economy shut down and the federal government delayed tax returns into a new state fiscal year, the fiscal picture looked bleak.

“We were woefully unprepared, but it’s inexcusable, because that [budget standoff] was a man-made catastrophe,” Illinois Comptroller Susana Mendoza told Route Fifty in an interview. “It was a self-inflicted wound to Illinois.”

The lack of a cushion is one reason why Fitch downgraded Illinois’ bonds at the time. And it turned out to be prescient. Illinois was the only state to borrow money from the Federal Reserve through a special program to help state and local governments cope with the pandemic’s economic fallout.

But as revenues recovered, so did Illinois’ finances. The state paid back its loan from the Fed early with surplus tax revenue.

Like other states, Illinois received significant direct aid from the American Rescue Plan Act that President Biden signed during his early days in office.

While congressional Republicans have criticized the $350 billion in support for state and local governments as a blue state bailout, Kim, the Fitch Ratings analyst, said other federal support helped Illinois and other states even more.

“Frankly, the entire country, every state, every city and every local government benefited from all the economic stimulus that the federal government provided – trillions and trillions of dollars,” he said.

Stimulus checks, enhanced unemployment benefits and business loans “saved the economy and backstopped state and local governments,” Kim said. “The concern was that the bottom would fall out of the economy… Because the federal government stepped in with trillions of dollars of aid to support the economy, those worst-case scenarios did not happen.”

Of course, direct aid was helpful too, especially for Illinois, he said. Lawmakers dedicated much of the money for one-time projects, rather than recurring expenses that could drag down future budgets. In late March, Illinois legislators passed a law to use ARPA money to pay back $2.7 billion of the $4.5 billion the state owes the federal government for unemployment insurance costs that ballooned during the pandemic. The same law also helped pay down long-standing debts for state employee health insurance and added money for the state’s notoriously underfunded pension systems.

Making Progress

Illinois officials have been chipping away at other long-standing financial problems.

Last week, the comptroller’s office paid back the last $297 million of short-term borrowing within different state accounts that it had used to get through the budget impasse. The somewhat obscure accounting achievement is one of the milestones Fitch said it would track to consider whether to upgrade Illinois’ bonds.

Mendoza also used the occasion to announce, in essence, that the era of Illinois’ bill backlog was over. The state had paid its bills within 15 business days since July, meaning outstanding bills would now be referred to simply as “accounts payable,” she explained.

The comptroller, a Chicago Democrat, has had to manage Illinois’ cash flow through tumultuous times. She had to decide which bills to pay when. That meant prioritizing Medicaid bills and other spending that would come with a federal match. 

Mendoza advocated for short-term borrowing to avoid paying high-interest rates on overdue bills. Last month, she came to Washington to advocate for legislation to forgive the interest Illinois and other states must pay on outstanding unemployment insurance debts. She’s also pushing for better funding of a state rainy day fund.

“The reason you hear me have some level of confidence here is because truly the worst virus to ever hit our state’s finances was not Covid, it was Bruce Rauner,” she said. “As comptroller, if I could get through that, nothing would scare me.”

A Skeptical Public

The idea that Illinois is straightening out its budget mess is no easy sell.

“The fact that we’ve been able to turn that around, not during the best economic bull market of our lifetimes, but during a freaking global pandemic, is impressive no matter who you are,” Mendoza said. “I know it’s a hard story to believe because we’re not used to believing in good news about Illinois.”

Chris Mooney, a political science professor who studies state politics at the University of Illinois at Chicago, said voters generally don’t follow the ins and outs of state government, so the improved finances of Illinois’ government might not have registered with them.

“Bad news is more attention grabbing than good news. So if the budget is crashing and burning, people are paying more attention to that than if [the state] increases its rainy day fund by 2%,” he said. 

But the way most voters get their information about state government, he pointed out, is from political campaigns. Pritzker, who recently donated $90 million of his wealth to his re-election campaign, can hammer home the message and take Illinois’ budget problems off the table for Republican challengers, Mooney said.

In fact, the improving budget picture could put those GOP candidates in a bind, because many people in the state associate problems with Illinois’ finances with Rauner, a Republican governor.

“Republicans will be hoisted on their own petard, because they’ve been hammering this for so long,” Mooney said. Now Pritzker can say, “We solved that problem,” Mooney said.

“Even though [the budget] is generally a boring problem, in Illinois for the last 15 to 20 years, it’s been really, really salient,” he added.

Big Problems Remain

For all the good news recently, Illinois still faces monumental financial challenges. The state has $130 billion in unfunded pension liability, meaning that its system is only 46% funded. Experts warn that its tax structure will continue to produce budget crunches, because its sales tax applies largely only to goods and not services.

Pritzker tried in 2020 to get voter approval for a change in the state constitution that would allow the state to use a graduated income tax, rather than the flat rate it has. But that idea fell short, garnering only 47% of the vote, compared to the 60% threshold it needed.

“Part of the reason voters rejected the proposal … is because of a lack of faith in elected officials to be good fiscal stewards,” said Amanda Kass, the associate director of the Government Finance Research Center at the University of Illinois at Chicago.

Voters were also wary of Springfield, because long-serving House Speaker Mike Madigan was in control despite a growing corruption scandal that involved some of his closest allies. House Democrats forced him out last year, and he was indicted in March.

Kass said the developments could win back the favor of Illinois voters, eventually.

“It is important to demonstrate to Illinois taxpayers and residents that politicians can be responsible fiscal stewards,” she said. “Having this kind of [budget] change and the political changes in the House of Representatives could lead voters to having more faith in their elected officials. Perhaps that leads to the ability to have a graduated income tax, but that’s years down the line.”