CHICAGO — Local Illinois governments came out on the winning side in the new state budget, capital package, gambling expansion, and legalization of recreational cannabis adopted during a whirlwind 2019 spring legislative session.
That’s the general assessment from Moody’s Investors Service, though it comes with some caveats, as the rating company calls gambling and cannabis-related revenues uncertain and says they won’t be a panacea for the pension strains weighing on some local governments like Chicago.
“The bills, which the governor is expected to sign into law, are credit positive for local governments in Illinois because they will receive new funding for capital and potential new sources of operating revenue,” Moody’s wrote in a report published Thursday that digs into the local impact of the various measures passed by the Baa-rated state.
Pritzker signed the budget, which includes school aid, on June 5. Other bills that were part of his agenda await his signature.
Public schools emerged the top benefactors with the receipt of $375 million in additional funding. That’s up from a scheduled increase under a revised school aid formula adopted in 2017. Increases, even those scheduled, are never certain until passed by lawmakers and signed by the governor. The hike follows $350 increases handed out in fiscal 2018 and again in the current fiscal year.
That’s especially good news for junk-rated Chicago Public Schools as the additional planned aid — that also holds funding levels harmless even if districts see an enrollment drop — has counted on the increases to help dig itself out of a budget and liquidity hole and begin the work of rebuilding reserves. CPS is rated B2 and stable by Moody’s.
Districts are categorized into one of four tiers based on need. Tier one and two, including CPS, receive most of any boost in state funding. Those in the other tiers would see their aid maintained.
“Local governments will receive a significant infusion of capital dollars under the Rebuild Illinois capital plan,” Moody’s said of the six-year, $45 billion capital program approved by lawmakers.
To help fund the capital package, the state’s 19 cent motor fuel tax will double to 38 cents. The increase is expected to generate $1.2 billion, of which 32% would go to local governments. Future raises are tied to inflation.
Additionally, municipalities in Cook County are allowed to increase their local gas tax by three cents on top of the statewide bump. The so-called collar counties around Chicago of Will, Lake, DuPage, Kane, and McHenry can raise their gas tax a maximum of eight cents.
“The impact of legislation authorizing a massive expansion of gambling is less certain,” Moody’s said.
The state package legalized sports betting, expanded video gaming, raised the number of gambling positions at existing venues, and approved six new casino licenses. The state currently has 10 licenses.
All four cities chosen for casinos are contending with rising pension costs.
The four are: Chicago, which is at the Ba1 and stable level; Waukegan, which is far north of Chicago near the Wisconsin border and rated A2 by Moody’s and stable; Rockford, which is located about 90 miles northwest of Chicago and is rated A2 and negative;and Danville, which is about 120 miles south of Chicago and is rated Baa3 and stable.
A fifth license will be located in Williamson County and the sixth is in Chicago’s south suburbs.
“The new casinos have the potential to generate significant revenues” with a “meaningful” impact “but those revenues are difficult to project, particularly as the gambling landscape is becoming increasingly competitive,” Moody’s said. The local share of casino revenue that municipalities see from the existing 10 licenses ranged from $3 million to $25 million in 2018.
Chicago could see big benefits as its casino could host up to 4,000 gaming positions. That’s more than two times the number of positions authorized for other casinos in the state. Existing pension legislation requires that any profits from a future casino go to fund police and firefighter pensions. The city’s four funds carry a $28 billion tab and are just 26.5% funded.
Downsides include revenue-sharing provisions for some casinos with existing venues and revenues generated at existing casinos that have fallen over the last five years. “There is also inherent budget risk in having a growing share of a budget comprised of volatile revenue while the share of expenditures comprised of fixed obligations grows,” Moody’s wrote.
While a credit positive, cannabis is also uncertain. Denver collected $27.6 million in sales taxes on about $500 million in gross sales in 2016, which amounted to a minimal 2% of general fund revenue. “As with gaming revenues, cannabis revenue has proven to be volatile,” Moody’s said.
Local governments also stand to benefit if voters approve a constitutional amendment scrapping the state’s current flat income tax for a progressive one, though revenue would be limited to $100 million. .
“The increased revenue would favorably reduce the likelihood of cuts in income tax distributions to local governments,” Moody’ said, adding there’s also a political downside as the increases could make it tougher to raise local taxes.