Illinois budget watchdog groups are skeptical over whether the $38.5 billion fiscal 2019 state budget that passed Thursday is truly “balanced” .

Lawmakers from both sides of the aisle should restrain their self-praise about the budget plan given that it failed to deal with the state’s $129 billion underfunded pension quagmire and its $7 billion bill backlog.

The budget relies on $240 million from the long stalled sale of the state’s downtown Chicago headquarters, and $445 million in savings from three pension reform measures, including two buyout offers. The pension savings, if they materialize, would bring the state’s payments next year down to $7.3 billion.

The budget documents are also short on details on $1 billion of borrowing authorized to pay for the buyouts and how that financing would be repaid, Msall said.

The budget also doesn’t account for what the state has estimated is a $300 million tab to cover step raises based on employees’ experience, which the state had withheld during contract negotiations. The courts have ordered the state to make good on the back pay and lawmakers during the budget debate acknowledged the cost would eventually need to be incorporated in the budget.

The budget leaves the unpaid bill backlog to linger. It hit a high of $14.7 billion last year as bills mounted during the impasse and has since been whittled down to about $7 billion with $6 billion in bond borrowing, the leveraging of federal funds, and inter-fund borrowing. The state has paid more than $1 billion in interest for bills that went unpaid during the impasse.

Lawmakers approved legislation Thursday that allows the state treasurer to use up to $2 billion of available state investment dollars to pay down the backlog at a few percentage points of interest compared to the 9% to 12% currently paid. The budget implementation bill incorporates savings from at least $1 billion in treasurer funds going to pay down bills, according to lawmakers.

While analysts digest the budget’s details, the market has already weighed in. The state’s spreads to the Municipal Market Data’s benchmark had narrowed to 185 basis points on Wednesday from 202 bp on May 1.

IHS Markit said late Thursday trading was heavy with spreads of 169 to 176 bp seen in maturities up to 11 years. Spreads were at 194 on May 23, said IHS’ Edward Lee.

Moody’s Investors Service and S&P Global Ratings give the state’s general obligation bonds their lowest investment grade ratings, with Moody’s assigning a negative outlook and S&P a stable outlook. Fitch Ratings is one notch higher at BBB and assigns a negative outlook. The rating agencies have not yet commented on the budget package but Moody’s issued a special report Thursday warning that action is needed soon to tackle Illinois’ rising pension, retiree healthcare, and debt costs.

The House gave final approval to the budget early Thursday afternoon in a scene different from the partisan bickering that’s dominated budget discussions. The House voted 97-18 on the budget bill. It voted 100-14 on a companion bill needed to execute the spending in the appropriations bill.

Only in Illinois would a major election year bring at least a modicum of normalcy, with lawmakers approving a full-year state budget both Republicans and Democrats call balanced and one that Gov. Bruce Rauner will approve.

We live in a trust-challenged environment under the dome, Democratic state Sen. Heather Steans noted at the Capitol before lawmakers easily approved the $38.5 billion spending plan.

Helping to build trust was the desire on all sides to avoid an election-year repeat of the confrontations that sparked a historic budget stalemate that weakened social services and higher education. Those conflicts last year led some Republicans to join Democrats and override the governor’s veto of an income tax hike and spending plan.

Now, Rauner’s office has invited legislative leaders of both parties to the Thompson Center on Monday for a budget-signing ceremony.

The Illinois Senate approved a bipartisan budget deal that invests in public education at all levels and balances through targeted savings, reforms and utilizing existing state revenues.

“This is an important step forward. This budget helps restore stability to Illinois, which is what we need. There remains more work to do, but this is a bipartisan accomplishment that we can hopefully build upon,” said Illinois Senate President John J. Cullerton.

The budget was negotiated by bipartisan working groups, finalized by legislative leaders and then approved in a bipartisan vote that signifies, at least for now, an end to years of partisan budget fights that decimated universities, human service providers and ballooned the state’s debt.

The state’s operating budget totals $38.5 billion, which is a $600 million increase over the current budget. That increase is largely due to education funding increases and making required pension payments.

The proposal won Senate approval 56-2. It now goes to the Illinois House.

Highlights include …

Education:

• $350 million increase in K-12 education to honor the commitments made when lawmakers overhauled how the state funds public schools last year. The new funding formula ensures every school district will see an increase.
$50 million increase for early childhood programs.
The budget deal does not include shifting millions in state pension costs onto local school districts.
State support for the retired teacher health insurance program (TRIP) is maintained.

Higher Education:

• Higher education sees a 2 percent increase after years of budget cuts. That translates into a $25 million increase for public universities and community colleges.
In addition, the state creates a $25 million scholarship fund to be matched by public universities and community colleges. The goal of this new tuition assistance program is to keep Illinois students in Illinois attending Illinois schools.
The budget deal does not include shifting millions in state pension costs to universities and colleges.

Human Services:

• The budget includes and funds a 50-cent wage increase for caregivers who work primarily with developmentally disabled individuals.
Numerous human service programs including those addressing epilepsy, autism, youth employment, addiction treatment and community mental health had been cut if not zeroed out in the governor’s budget. They are funded in this budget deal.

Local Government:

• Local governments would see a nearly $120 million increase over the current budget.
A 10 percent cut in the Local Government Distributive Fund in the current budget is reduced to a 5 percent cut. That results in a nearly $100 million increase for local governments.
The existing budget also implemented a 2 percent administrative fee for the state processing sales tax revenue for local governments. That fee is reduced to 1.5 percent in the FY19 budget. The result is an increase of nearly $20 million going to local governments.

Financial details:

• A more than $1 billion budget hole wiped out through savings, reforms and utilizing other available revenues.
The state is authorized to tap into up to $800 million sitting available in various state accounts. This allows the state to utilize that money now to fund programs and services and pay it back over the next two years.
A series of voluntary pension reforms are projected to bring in $445 million in budget savings.

Those reforms include:

• Inactive buyout: Former public sector workers vested in the program and owed an annuity when they reach the qualifying retirement age would gain the option of cashing out now for 60 percent of the value. Savings estimated at $41 million
COLA buyout: Tier 1 employees owed a compounding 3 percent COLA in retirement would get the option of having the state buyout the compounded COLA for 70 percent of the value. Savings estimated at $382 million.
Pension spiking: End of career raises would be limited to 3 percent, currently 6 percent. This means if school districts award end of career raises in excess of 3 percent, the retirement system charges them to cover the increased expense to state taxpayers. Savings estimated at $22 million.

Tucked inside the 763-page budget implementation bill adopted by the Illinois House today is a provision that imposes penalties on school districts entering into contracts and collective bargaining agreements that provide TRS members with end-of-career increases in excess of 3% per year. This reduces the current limit of 6% per year.  The provision applies only to contracts or collective bargaining agreements entered into, amended, or renewed on or after the effective date of the legislation.  However, given that the Senate already passed this bill and the effective date will be when the Governor signs the legislation, there may be a small window before the penalties go into effect.

There are multiple implications of this provision for employers to consider. The penalty applies if the amount of a TRS member’s salary for any school year used to determine the final average salary exceeds the prior year’s salary by more than 3%. If the salary increase exceeds the 3% limit, the employer must pay a penalty to TRS equal to the present value of the increase in benefits resulting from the portion of the salary increase in excess of 3%.  Employers should also keep in mind that creditable earnings include more than salaries. They also include extracurricular pay, stipends and contributions to tax-deferred retirement plans, among other payments.  Finally, the average salary for Tier I employees is calculated using the four highest, consecutive annual salary rates within the last 10 years of creditable service.  For Tier II members, the average salary is the average of the eight highest, consecutive annual salary rates within the last 10 years of creditable service.

Again, this legislation does not change the law for current employment contracts and collective bargaining agreements. Only new and modified contracts will incur the penalty. Therefore, employers should carefully review any new and modified contracts to ensure they are in compliance.