(Bloomberg) -- Illinois, whose chronic fiscal strains have left it with a lower credit rating than any other state, slashed the size of its projected deficit for the next fiscal year as tax revenue fared better than expected during the pandemic.
Governor J.B. Pritzker’s office said Tuesday the shortfall for the year that begins in July will be $3 billion, down from a previous estimate of $5.5 billion. The number shrank after he directed the state to pay off a $700 million loan from the Federal Reserve early and the state’s “economy performed more strongly than expected,” according to the statement.
The state, whose bonds are rated just one step above junk, is among several across the country that have seen their finances fare better than initially feared when the pandemic first shut down wide swaths of the economy. That’s largely because higher-income Americans that pay the bulk of income taxes continued to work from home -- so states’ revenues continued to rise or didn’t drop as much as first expected.
Even so, states have slashed their payrolls deeply since last year, exerting a drag on the economic recovery, and are anticipating that President Joe Biden will provide a large amount of aid to help them weather the rest of the pandemic.
“There is no question that this budget will include painful choices, but as the effect of the pandemic diminishes over the coming months, the governor will continue to focus on economic recovery for the hardest hit,” Jordan Abudayyeh, a spokesperson for Pritzker, said in the statement.
Related: State and City Budgets Stifle Broader U.S. Economic Recovery
Illinois was wrestling with budget shortfalls long before the pandemic struck, leaving it at risk of becoming the first state ever to be stripped of its investment-grade rating. That was largely because of rising costs due to an unfunded pension liability of some $141 billion.
Illinois was the only state to borrow from the Federal Reserve’s emergency lending line because the interest rates it faced in the bond market surged last year. The yields on its bonds -- which hit more than 6% for 10-year securities in March -- have since tumbled to around 2% as the outlook for the state improved.
“The governor will also continue to advance long-term structural budget improvements that continue the stronger fiscal trajectory Illinois was on before the pandemic, ” Abudayyeh said.
Pritzker isn’t including an income-tax increase in his fiscal 2022 budget. Illinois voter’s rejection in November of the graduated income tax that Pritzker had advocated had spurred speculation he would seek to increase the state’s flat income-tax rate.
Pritzker intends instead to rely on $900 million by closing corporate-tax loopholes and directing cigarette-tax revenue to the state’s general fund. It will hold state spending flat after $700 million in spending cuts for fiscal 2021. The governor is scheduled to release his budget proposal Feb. 17.
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