U.S.

PUBLIC FINANCE

SECTOR COMMENT Local government – Illinois

13 June 2019
Legislative flurry benefits schools; impact of
gambling and legalized cannabis less certain
On June 5, Illinois Governor J.B. Pritzker signed into law the state's fiscal 2020 budget. School
districts designated as Tier 1 or Tier 2, including Chicago Public Schools (CPS, B2 stable),
emerged as the biggest winners with a $375 million bump in formula funding.1
Contacts
David Levett +1.312.706.9990 The signing follows a flurry of bills (see Exhibit 1) passed by the state legislature before it
VP-Senior Analyst adjourned on June 2. The bills, which the governor is expected to sign into law, are credit
david.levett@moodys.com
positive for local governments in Illinois (Baa3 stable) because they will receive new funding
Coley J Anderson +1.312.706.9961 for capital and potential new sources of operating revenue.
AVP-Analyst
coley.anderson@moodys.com
Exhibit 1
Rachel Cortez +1.312.706.9956 Local governments benefit from recent legislative developments; school districts are biggest
Senior Vice President/Manager winners
rachel.cortez@moodys.com
Initiative Sector Anticipated impact Desciption
Alexandra S. Parker +1.212.553.4889 City Low to moderate
MD-Public Finance Muncipalities and counties can
Recreational
alexandra.parker@moodys.com impliment a cannabis tax on top
cannabis
of local sales taxes applying.
» Contacts continued on last page County Low to moderate
Tier 1-2 schools Moderate to high
CLIENT SERVICES Formula funding increased by
Education
$375M for the upcoming fiscal
funding
Americas 1-212-553-1653 Tier 3-4 schools Negligible year.

Asia Pacific 852-3551-3077 Cities with new or existing Moderate to High

casino The gambling expansion bill
Japan 81-3-5408-4100 allows sports betting, as many
Gambling
as six new casinos, expansion
EMEA 44-20-7772-5454 expansion
of the state's existing casinos
and video gaming.
Cities without casino Low to moderate
Progressive Cities To be determined
state income
tax Residents will vote on in a 2020
amemdment referendum.
Counties To be determined
Cities Moderate
Doubling of motor fuel tax, with
32% of new revenue going to
Capital plan
locals; authority to increase
Counties Moderate local rates.

Source: Moody's Investors Service

 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

For the third straight year, the state budget prioritizes K-12 education funding by exceeding the aggressive funding targets called for by
the evidence-based school funding formula, which the state introduced in 2017. Each school district is categorized into one of four tiers
based on need. Tier 1 and Tier 2 districts, including CPS, receive the vast majority of any boost in state funding.

For fiscal 2020, the state will increase formula funding by close to $375 million, including $50 million for property tax relief, following
boosts of $350 million in fiscal years 2018 and 2019. Nearly 70% of districts are currently designated as Tier 1 or Tier 2 (see Exhibit
2) and will receive over 90% of the increased funding. Other districts will continue to benefit from the formula's “hold harmless”
provision, which prevents reductions in state aid for any school district even if it currently is considered funded in excess of need or
there is a drop in enrollment.

Exhibit 2
Majority of districts will materially benefit from increased funding
Percent of rated districts in each tier of funding

Tier 4
24% Tier 1
30%

Tier 3
7%

Tier 2
39%

Source: Moody's Investors Service

Local governments will receive a significant infusion of capital dollars under the Rebuild Illinois capital plan. The statewide motor fuel
tax rate will double to 38 cents per gallon from 19 cents per gallon. It will increase each year thereafter in line with inflation. The rate
hike is projected to yield an additional $1.2 billion in revenue each year, approximately 32% of which will go to local governments. In
addition, municipalities in Cook County (A2 stable) will be allowed to increase their local gas tax by 3 cents on top of the statewide
bump, while Will (Aa1) and Lake (Aaa) Du Page (Aaa), Kane (Aa1) and McHenry (Aaa) counties will be permitted to increase their local
gas tax to a max of 8 cents.

The impact of legislation authorizing a massive expansion of gambling is less certain. The legislation will add six casinos, including in
four cities that we rate: Chicago (Ba1 stable), Rockford (A2 negative), Waukegan (A2) and Danville (Baa3 stable)2 There will also be an
expansion at the current ten existing casinos and of video gaming. The new casinos have the potential to generate significant revenues,
but those revenues are difficult to project, particularly as the gambling landscape is becoming increasingly competitive. Furthermore,
revenue-sharing provisions will dilute the impact for the individual cities receiving new casinos. The gambling expansion bill includes
provisions that require certain riverboat or casino gambling revenues to be shared with neighboring communities.

All of the cities chosen for casinos are grappling with rising pension costs. Aggregate operating revenue for Rockford, Waukegan and
Danville grew by just 6% between fiscal 2013-17, while pension contributions grew by 31%. Despite this rapid growth in contributions,
however, none of these cities are “treading water” on even their reported unfunded liabilities. The 2017 tread water gaps for Rockford,
Waukegan and Danville were $7.2 million, $5.9 million and $2.2 million, respectively (see Exhibit 3).3 There are currently 10 gambling
sites in Illinois, for which the local share of revenue generated in 2018 ranged from $3 million to $25 million. If the new casinos were
to generate revenues even at the low end of that range, that could have a meaningful impact in comparison with pension contribution
gaps using reported assumptions. However, the revenues produced by existing locations have steadily declined over the last five years,

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

2 13 June 2019 Local government – Illinois: Legislative flurry benefits schools; impact of gambling and legalized cannabis less certain
 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

a trend that could be exacerbated by increased competition. 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.

Exhibit 3
Illinois cities getting new casinos all have large pension contribution shortfalls
City Rating Tread water gap ($millions) Tread water gap as % of revenue

Waukegan A2 $5.9 7%
Rockford A2 negative $7.2 5%
Danville Baa3 stable $2.2 7%
Chicago Ba1 stable $1,068.0 20%

Sources: Municipal Financial Ratio Analysis, Moody's Investors Service: ANPL rise for most of the 50 largest local governments in 2017

Chicago’s casino is authorized to have 4,000 gaming positions, which is more than two times the number of positions authorized for
other casinos in Illinois, so Chicago stands to gain a greater amount of new revenue. The city also stands to gain a significant share
of the revenues from cannabis legalization. However, Chicago also has a much larger pension contribution shortfall, relative to its
operating budget, than other cities so the city’s revenue needs are more pronounced.

While credit positive, most Illinois local governments will receive minimal tax revenue from cannabis sales, if the state's experience
mirrors other states with legalized recreational cannabis such as Colorado. For example, in fiscal 2016, Denver (Aaa stable) collected
$27.6 million in cannabis sales taxes on roughly $500 million in gross sales, which amounted to a minimal 2% of general fund revenue.
However, as with gaming revenues, cannabis revenue has proven to be volatile.4

The legislative session also yielded an opportunity for residents to vote to implement a statewide progressive tax structure on the
November 2020 ballot. The governor has estimated if approved the change would generate well over $3 billion a year in new revenue.
The increased revenue would favorably reduce the likelihood of cuts in income tax distributions to local governments. Still, local
governments are expected to receive a small amount of the increased revenue if the ballot measure were to pass. In addition, an
increased state tax burden could impact the practical political headroom for local units of government to raise revenues locally.

3 13 June 2019 Local government – Illinois: Legislative flurry benefits schools; impact of gambling and legalized cannabis less certain
 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Moody’s related publications

Sector In-Depth

» Growing school pension burdens will require more state support, April 9, 2019

Sector Comment

» Recreational marijuana tax revenues are marginal credit positives, May 8, 2018

Issuer Comment

» Pensions, taxes, out-migration top list of credit issues facing new governor February 5, 2019

Credit Opinion

» Chicago Board of Education, IL: Update to credit analysis, March 22, 2019

» Chicago (City of) IL: Update following revision of outlook to stable, July 13, 2018

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

Endnotes
1 Illinois SB 0262
2 One of the other two casinos will be located in a south Chicago suburb (somewhere in the townships of Bloom, Bremen, Calumet, Rich, Thorton or Worth)
and the other will be located in an unincorporated area of Williamson County.
3 An annual government contribution that treads water equals the sum of employer service cost and interest on the reported net pension liability at the
start of the fiscal year. A pension plan that receives an employer contribution equal to tread water will end the year with an unchanged net pension
liability relative to the beginning of the year if all plan assumptions hold.
4 The bill gives local jurisdictions the opportunity to opt out or put restrictions on dispensaries.

4 13 June 2019 Local government – Illinois: Legislative flurry benefits schools; impact of gambling and legalized cannabis less certain
 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

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5 13 June 2019 Local government – Illinois: Legislative flurry benefits schools; impact of gambling and legalized cannabis less certain
 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Contributors

Nadia Morelos +1.312.706.9969

Associate Analyst
nadia.morelos@moodys.com

6 13 June 2019 Local government – Illinois: Legislative flurry benefits schools; impact of gambling and legalized cannabis less certain