The nation’s three major bond rating agencies weighed in less than a week after lawmakers approved major changes designed to save up to $160 billion in public pension costs over the coming decades.
The conclusion from Standard and Poor’s, Fitch Ratings, and Moody’s Investors Service was one of cautious optimism but no change in the state’s worst-in-the-nation credit rating…yet.
The agencies also fired a warning shot on the most significant financial issue that will face the state in the coming year – what to do about the expiration of a major portion of the 67% income tax increase adopted in 2011.
State’s credit rating unchanged
All three agencies left Illinois’ credit rating unchanged, although Standard and Poor’s modified the state’s outlook from “negative” to “developing.” Both Moody’s and Fitch retained a “negative” outlook, meaning they expect the state could see further downgrades in the future.
The agencies praised the state for finally tackling the pension issue, but tempered their enthusiasm by reserving final judgment until a formal financial assessment can be completed. They cautioned an expected lawsuit could reverse the gains and warned that the state’s pension underfunding is only a symptom of deeper financial mismanagement.
Moody’s for example listed among Illinois’ challenges, “long-term weak management practices reflected in pension under-funding, bill payment delays and chronic GAAP-basis negative fund balances.” (GAAP is a type of accounting system used to determine the financial health of a government or business.)
Fitch Ratings said, “…the state will need to find a more permanent solution to the mismatch between spending and revenues.”
Tax money not used as promised
Our state faces a major financial cliff when the “temporary” 67% income tax hike expires because Gov. Pat Quinn has failed to take the necessary steps to cut spending.
The tax increase, passed in the early morning hours Jan. 12, 2011, was sold to the public as a way to pay off old bills and get the state’s fiscal house in order; however, much of the money has instead been used to expand state programs. No Republican lawmakers voted for the “temporary” tax.
Illinois has embarked on a major expansion of Medicaid, including an early and optional expansion in advance of the implementation of the federal Affordable Care Act, commonly known as Obamacare.
Senate and House Republicans have expressed concerns that the Quinn Administration is not aggressively implementing Medicaid reforms needed to save the state millions.
Small businesses opposed bills
A trio of measures opposed by small businesses will go into effect Jan. 1. All were approved despite unanimous Republican opposition in the Senate.
Opponents raised concerns because all three measures impose new regulatory burdens on smaller employers, while exempting large unionized companies from having to meet the same requirements.
They fear increased regulatory burdens will further harm the state’s small businesses at a time when Illinois has the second highest unemployment rate in the country and questioned why regulations were being applied unevenly. The state’s major small-business organization, the National Federation of Independent Business (NFIB), opposed all three bills.
House Bill 923 requires construction companies to report payments to nonemployees for construction services. Proponents argued it would ensure that contractors are properly funding workers’ compensation and unemployment insurance by paying related taxes. However, the legislation offered an exemption that can only be met by union contractors.
Kim Clarke-Maisch, the Illinois State Director for the NFIB, said her organization fears innocent employers could be hurt for honest mistakes.
“Organized labor contends contractors are erroneously making employees independent contractors in order to escape paying workers’ compensation, unemployment insurance and other related taxes. Unfortunately, the reporting comes with a debarment clause that could put many contractors, which make honest mistakes, out of business,” she said.
House Bill 2649 makes changes to Illinois’ Employee Classification Law and requires hearings for those employers accused of wrongly classifying workers as independent contractors. As with House Bill 923, proponents argue employers are attempting to evade payroll taxes. But again, the measure was crafted to offer an exemption only to union employers.
House Bill 3223, which requires additional employee information to meet certified payroll requirements under the Prevailing Wage Act, could result in ending an employer’s ability to secure future state work merely for paperwork mistakes, according to Clark-Maisch.
“The new requirements are troublesome not only for the sheer amount of extra work, but the likelihood that mistakes could be made. Mistakes under the Prevailing Wage law are costly. Two violations in five years and a contractor is barred from state work, potentially taking away someone’s livelihood and the jobs they create,” she said.