Pritzker Finds Running Most-Troubled U.S. State Only Gets Harder
(Bloomberg) -- J.B. Pritzker certainly knew what he was getting into when he ran for governor of debt-laden Illinois in 2018, a position once dubbed the worst job in American politics.
But the billionaire scion of the Hyatt hotel fortune could not have imagined a global pandemic that would decimate his state’s budget and push its bonds back to the brink of junk status -- a fate that would be unprecedented for a state. Its rainy day fund is down to a mere $818,000 and last year its pension plans for state workers were underfunded in the amount of a record $138 billion.
The Covid-19 shutdowns have devastated the finances of nearly every state and city in the U.S., from New York to California, Michigan and Texas. The states alone face budget deficits of $650 billion over the next three years and almost 1 million state and local workers have lost their jobs, according to forecasts and government data.
But perhaps nowhere might be as fragile as Illinois, whose credit rating pre-pandemic was already the worst among all states in the U.S. Now, Pritzker and Illinois have become whipping boys in a heated and mostly partisan national debate over how much cash Washington should fork over to patch state budgets shredded by the plunge in tax revenue. A chorus of Republicans, from President Donald Trump to Senator Mitch McConnell, have questioned whether states like Illinois deserve a bailout.
All this frustrates the 55-year-old Pritzker, who, according to credit rating companies and investors, was making a bit of progress stabilizing the state’s finances before coronavirus struck.
“It’s ridiculous to point at any individual state in this moment of national crisis,” Pritzker said in a telephone interview last week from his home, where he is self-isolating after a staffer tested positive for Covid-19. “No doubt historically Illinois has had real fiscal challenges. I inherited those. We were on track to put our fiscal house in order until Covid-19 came along.”
As part of a federal bailout measure, he is seeking at least $7 billion to make up for lost revenue through June 2021, close to 20% of Illinois’s budget. That would give a considerable boost to the state’s credit outlook, according to Fitch Ratings. But if current trends continue, its bonds could be downgraded to junk in the next year or two, Fitch said. And while bankruptcy and default aren’t in the cards, the state would likely have to sharply reduce spending on things like education and social services without additional federal aid.
Already, investors have driven the yields for its bonds maturing in 10 years to 4.4 percentage points over the AAA municipal benchmark this month, far exceeding every other U.S. state and to the highest on record.
Illinois’s fiscal ails have long revolved around its pension system for teachers and state workers. For years, lawmakers and governors simply put off fully funding the plans. Those unfunded pension liabilities of $138 billion mean only 40% is funded -- the worst in the nation as a percent of a state’s personal income.
Moreover, the pensions eat up a big portion of the state’s budget, around a fifth of general revenue. That crowds out spending on education or social services, leading to perennial fiscal crunches. In fiscal 2016 and 2017, the state didn’t even pass a budget, paralyzed by wrangling between then-Governor Bruce Rauner, a Republican, and the Democratic-controlled General Assembly.
Pritzker set about overhauling the state’s finances when he took office, backed by that friendly legislature. He was familiar with 10-figure numbers. He’s worth some $3.3 billion, according to the Bloomberg Billionaires Index, much from the inheritance left by his family’s hotel and manufacturing empire. That money had seeded a private equity and venture capital firm that he and his older brother, Tony, were running in the years before entering office.
In his first year as governor, Illinois accomplished a notable feat -- it actually passed a budget on time. Pritzker also pushed to increase revenue: the state legalized adult-use recreational marijuana in January. In November, he will ask voters to approve a measure to shift to a progressive income tax from a flat rate, raising more revenue. The state’s unpaid bills dropped to less than $7 billion from $14 billion in 2017.
In July, seeing better revenue among other improvements, Fitch Ratings responded by boosting the state’s credit outlook. And in February, Pritzker proposed a budget with a small surplus for the year starting this July 1. Its cost of borrowing shrank to the lowest in years.
Then came the pandemic. Economic activity in the nation’s sixth most-populous state came to a near standstill and tax revenue cratered.
The ratings companies quickly acted. Fitch Ratings last month downgraded the state to just one-notch above junk, joining S&P Global Ratings and Moody’s Investors Service. All three cut their outlook on the state’s debt to negative in April.
“Obviously, everybody is concerned about downgrades, especially in a world where you know we have a $7.5 billion hole in our state budget,” Pritzker said.
Last week, Illinois managed to sell an $800 million debt issue, though at a top yield of 5.85%, nearly four percentage points above top-rated benchmark debt. Earlier, it had to delay a short-term offering of $1.2 billion amid record borrowing costs.
Still, Pritzker said he’s hopeful markets recognize the actions the state is taking to re-open the economy and manage its finances. Republican state lawmakers have been critical of his five-phase re-opening plan, calling it too slow. And now top GOP leaders plan to challenge the progressive income tax measure.
Illinois is among a host of states, blue and red alike, that face huge virus-related shortfalls. California Governor Gavin Newsom has said the federal government needs to help with a $54 billion deficit projected through June 2021, and New York faces a three-year budget gap of $25.6 billion.
On Friday, the House passed a bill that would funnel more than $1 trillion to help states and local governments, but it is unlikely to move forward in the GOP-controlled Senate, where it’s been described as a liberal wish list.
Illinois’s plea for aid wasn’t helped when Senate President Don Harmon last month asked that any package include $10 billion for its pensions. The Chicago Tribune called it “astonishingly brazen” and Pritzker quickly dismissed the idea. But it was seized on by Republicans, including a group of GOP state lawmakers from Wisconsin.
“After years of failing to fund their overly generous pension system, Illinois is already asking for the federal government to bail them out of these series of poor financial decisions,” they wrote their congressional delegation.
Pritzker said Illinois, which he calls a donor state because it sends more dollars to Washington than it gets back, is “not asking for more or less than any other state.” The absence of federal aid could lead to “massive” cuts in education and social service spending at a time when the needs of residents are growing, he said.
“There is a significant hole as a result in the budget from just a failure of revenues,” Pritzker said. “I speak with Republican and Democratic governors. Everybody, no matter whether you are talking about a blue state or red state, everybody is having a real challenge.”
©2020 Bloomberg L.P.