Illinois headed into the COVID-19 pandemic in weaker overall fiscal shape than the previous year as tax revenue fell short of offsetting the state’s obligations.
The state’s net position of governmental activities for fiscal year 2019 eroded by $4 billion, pushing the deficit up to a negative $193.1 billion from $189.1 billion, according to the audit of the state’s comprehensive annual financial results for the fiscal year ending June 30, 2019.
Auditor General Frank Mautino published the audit Thursday.
“The fiscal year 2019 CAFR reveals continuing underlying financial weaknesses which significantly impact the state’s overall fiscal health in regards to deferred liabilities, ongoing operational concerns related to cash management, and long-term concerns related to pension and other postemployment obligations,” the CAFR reads.
The results illustrate just how weak the state’s position was headed into the pandemic with its rainy day fund nearly empty and its fiscal 2020 budget and proposed 2021 budget balanced on a cash basis only. Some analysts also argue with Gov. J.B. Pritzker’s assessment that his budgets have been balanced, contending that the $6 billion to $7 billion bill backlog and pension contributions that fall short of actuarial levels mean the books are far from balanced.
The administration recently released revised estimates that show a $2.7 billion revenue loss for fiscal 2020 due to tax hits from the pandemic and another $4.6 billion blow for fiscal 2021. The state will competitively sell $1.2 billion of one-year cash flow certificates on Wednesday to help cover delayed income tax payments. The state is also banking on collecting $1.2 billion the next fiscal year from a change to a progressive income tax structure from the flat one, but voters must approve it in November.
“The finances of the state were already precarious going into 2020. Our vulnerabilities are fully exposed because unlike other states we don’t have cushions from reserves or surpluses, but it’s a moot point,” said Richard Ciccarone, president of Merritt Research Services said. “Any inroads the governor believes the state could have made this year will be derailed by this crisis.”
Just how worse off the state will find itself for fiscal 2020 will depend on investment results for the pension system come June 30. Ciccarone said the value in having the audit of the previous year amid the crisis is that it serves as a reminder of the state’s need to do more to stabilize its financial condition going forward to be better prepared for unforeseen strains.
Illinois weak finances heading into the crisis have been cited by President Trump and other Republicans in arguments over how much local and state government relief should be granted in the next federal aid package being debated. House Speaker Nancy Pelosi pitched a $1 trillion figure on Thursday.
The net position of governmental activities provides a sweeping view of the state’s condition that takes into account obligations including bonded, pension and retiree healthcare debts along with assets such as cash, investments, and other state holdings. “Over time, increases and decreases in net position measure whether the state’s financial position is improving or deteriorating,” the audit of the CAFR reads.
The numbers confirm an interim audit published by state Comptroller Susana Mendoza in January. The release comes 10 months after the books were closed on fiscal 2019. The state targets Dec. 31 as the release date for the previous year’s audit but it’s rarely achieved. Last year Illinois was the last state to release a comprehensive audit, publishing it in August, 425 days after the close of the fiscal year and 92 days behind California, the second-slowest state.
The Governmental Accounting Standards Board recommends 180 days as a standard. Officials blamed reporting problems inherited from the prior administration of Bruce Rauner who lost his November 2018 re-election bid to Pritzker for last year’s delay. The auditors concluded in the new report that reporting procedures were improved in fiscal 2019 but still flawed, resulting in difficulties in completing timely audits.
The growth in the net position based on governmental activities deficit marked a slowing from past years. It nosedived to a negative $121.2 billion in fiscal 2014 as pension woes mounted. It then tumbled again between fiscal 2016 and 2017 to $182.6 billion from $131.6 billion during the budget impasse.
Illinois is second only to New Jersey in the size of the net negative position. New Jersey reported results of a negative $202.1 billion, according to the Illinois audit. California and New Mexico were not counted as their CAFR’s were not available as of April 20, according to the Illinois audit. A total of 11 states reported negative positions. The strongest net position was reported by Arkansas at a positive $73.9 billion.
The state’s balance sheet benefitted from capital assets of $22.4 billion covering land, buildings, equipment, infrastructure, and other items with estimated useful lives of greater than one year. The largest portion of the state’s long-term liabilities came from its net pension liability of $138.6 billion, up $5 billion from the prior year, and other postemployment benefits liabilities of $54.5 billion and bonded debt $32.1 billion.
The general fund deficit decreased by $250 million over the previous year closing out the fiscal year at $7.5 billion. The deficit hit a peak of $14.6 billion in fiscal 2017 as the balance sheet felt the full brunt of a two-year budget impasse that ended at the start of fiscal 2018 with passage of a budget and income tax hike after several Republicans broker with Rauner and joined the Democratic majority. During the impasse, the deficit catapulted to $14.6 billion in fiscal 2017 from $9.6 billion in fiscal 2016 and $6.9 billion in fiscal 2015.
During the fiscal year, general fund revenues rose by $1.66 billion to $49.9 billion. General fund expenditures increased $1.6 billion to $48 billion due mainly to increased spending on health and social services programs of $1.4 billion. Other sources of financial resources saw a significant decrease due to the prior year issuance of $6 billion of general obligation bonds to pay down the state’s bill backlog. “Cash-flow problems caused the state to hold over $7.955 billion in payments and interfund transfers from the general fund at June 30, 2019,” the audit reads.
Additional revenue came from the mid-2017 income tax rate hike on individual income that was increased to 4.95% from 3.75% and the corporate income tax rate grew to 7% from 5.25%.
Fitch Ratings recently downgraded Illinois’ rating by one notch to BBB-minus and assigned a negative outlook. Moody’s Investors Service and S&P Global Ratings have affirmed their respective Baa3 and BBB-minus ratings, but both recently moved their outlook to negative from stable.