The House voted to override Rauner’s veto of a budget today following a brief  lockdown mode after white powder was thrown at Governor Bruce Rauner.

Emergency crews and a hazmat team at the Capitol determined the substance was not toxic.

Crain’s reports It’s official: Illinois has a budget. Your taxes are going up.

The action came on a largely party-line vote of 71-42, the bare number needed, with GOP lawmakers who broke from Rauner in passing the bill last week joining with all but a handful of Democrats to finalize the tax increase.

Since the Senate already had voted for an override, the action means that, effective July 1, the individual income tax will rise from 3.75 percent to 4.95 percent and the corporate rate from 5.25 percent to 7 percent.

Minutes after, the vote on the tax hike: the budget was approved 74-37 and the budget implementation bill 71-41.

Roll Call

A Roll Call highlights the action.

Republican Reps. Cavaletto, Davidsmeyer, Meier and Reis all switched from being “Yes” on 3rd Reading to being “No” on the override. So, they lost 5 Republicans (Rep. Pritchard was absent) and still approved the motion.

Democratic Reps. Halpin, Manley, Mayfield and Scherer switched from No to Yes. Scherer had said repeatedly that she was a “No” vote and is considered a target, so that vote is really interesting.

Junk Anyway

The Illinois Policy Institute reports Illinois Budget Proposal May Not Be Enough to Avoid Junk Rating.

The tax-hike, no-reform budget House Speaker Mike Madigan is pushing – and some Republicans have blessed – might not be enough to prevent a downgrade to junk, according to Moody’s Investors Service.

The rating agency warned in a press release July 5 that it was placing Illinois “under review” for a possible downgrade – even after acknowledging the impact of additional tax revenues.

Illinois is only one notch above junk status. If Moody’s decides to downgrade Illinois, Illinois will be the first state in the nation to ever fall to junk status.

The agency decided to put the state under review despite the fact that it expects lawmakers to override Gov. Bruce Rauner’s veto of the $4.8 billion tax hike, saying the review “incorporates our expectation that the legislature will implement revenue increases.”

Moody’s Reasoning – Key Points

Moody’s explained the possible downgrade in a credit service notice: Illinois’ GO and Related Ratings Under Review for Possible Downgrade

  • The decision to place the state’s ratings under review for downgrade incorporates our expectation that the legislature will implement revenue increases, overriding the governor’s vetoes.
  • Despite the progress toward budget balance that the emerging fiscal plan embodies, the plan entails substantial implementation risk.
  • The state’s baseline tax collections declined in fiscal 2017, suggesting that any tax increase may yield less revenue than anticipated in coming months.
  • The plan appears to lack concrete measures that will materially improve Illinois’ long-term capacity to address its unfunded pension liabilities.
  • A June 30 order from a federal judge that the state accelerate payments owed to Medicaid managed care organizations and service providers cast doubt on the state’s immediate ability to keep up with its statutory pension contribution schedule while also meeting obligations for debt service, payroll and school funding.
  • The state anticipates addressing its approximately $15 billion backlog of payments owed partly through a bond offering that probably will rank among the largest in the state’s history.
  • The state’s broader fiscal plan leaves Illinois not only dependent on market access to ease liquidity pressures, but also facing a significant increase in its tax-supported debt burden.
  • The effectiveness of the state’s strategy to contain and reduce its deferred bills, once the backlog-financing debt has been issued, remains to be seen.

Five Givens

  1. It is a given that the tax hike will not raise as much as expected.
  2. It is a given that public unions will demand raises after this tax hike.
  3. It is a given that some businesses will exit the state and others who may have been thinking about locating in Illinois will change their minds.
  4. It is a given that wealthy taxpayers will leave the state.
  5. It is a given that the budget fixes nothing.

Too Much

The tax hike is excessive. It will not bring in the anticipated revenues and much of the revenue the hike does bring in will be squandered for the reasons noted above.

Too Little

Governor Rauner is 0 for 44 in reforms he set out to accomplish. In fact, the corporate and personal tax hikes put the true score at -2 out of 44.

Too Late

Cash-strapped cities suffer under prevailing wage laws and untenable pension promises.

Corporations suffer under the worst workers’ compensation laws in the nation.

Citizens suffer from the highest property taxes in the nation.

It is too late to save Illinois from insolvency. Rather than fix the problem, these tax hikes will make matters worse.

Five Desperately Needed Reforms

  1. Municipal bankruptcy legislation
  2. Pension reform
  3. Right-to-Work legislation
  4. End of prevailing wage laws
  5. Workers’ compensation reform

Number one on my list of Illinois reforms is bankruptcy legislation. It is the only way out for numerous Illinois cities whose hands are tied by union-sponsored prevailing wage laws and pension plans.

Despite massive gains in the stock market since 2009, Illinois pension plans have gotten deeper and deeper into the hole.

Even a modest pullback in the stock market will sink numerous Illinois pension plans. I expect much worse than a modest pullback.

Required Pension Contributions to Double or Triple

Inquiring minds will also wish to consider Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely.

Illinois faces the same fate or worse.

Tax hikes are not the answer. Reform is the answer, and bankruptcy reform is at the top of the list.

Mike “Mish” Shedlock