#1State of Illinois General Obligation Bonds - Rating Agency Presentation March 11, 2019 STATE SEAL OF THE AUG. 26 FILLINOIS 1868 1818 1818 Deliberative Work Product AL OF THE STAT AUG. 26 1818 ILLINOIS#2Table of Contents 1. Introduction 2. Economy 3. Budget 4. Fiscal Stabilization 5. Debt Overview 6. Plan of Finance 2 5 8 14 23 26 AL OF THE STAT OF ILLINO AUG. 26 1818#3Presentation Participants SEAL OF TH STATE ME OF ILLINO 1868 1818 AUG. 26 1818 JB Pritzker Governor Anne Caprara Governor's Chief of Staff Alexis Sturm Director of GOMB Dan Hynes Deputy Governor Cameron Mock GOMB Chief of Staff and Senior Fiscal Advisor Kelly Hutchinson Director of Capital Markets AL OF THE STAT AUG. 26 1818 OF ILLINO#4State of Illinois Presenting Team The Honorable JB Pritzker, Governor of Illinois Raised by parents who taught him to fight for progressive values from a young age, JB Pritzker has spent his life standing up for social and economic justice and expanding opportunity in communities across the state of Illinois. Those values led JB to become a national leader in early childhood education, working for decades to create and expand early learning programs for low income children. After years of dedication, JB was asked by President Obama in 2014 to help organize the White House Summit on Early Childhood Education. In Illinois, JB recognized that thousands of children across the state go to school hungry every day, and kids can't learn well on an empty stomach. So JB partnered with the Greater Chicago Food Depository and Share our Strength to expand federal school breakfast grants in Illinois, making it possible for 230,000 more kids to get breakfast and start their day off right. As a businessman and entrepreneur, JB has helped create thousands of jobs in Illinois. In 2012, JB founded 1871, a non-profit small business incubator. 1871 brought together the educational and civic resources to support startup businesses, and so far it has helped entrepreneurs create more than 8,000 good-paying jobs and hundreds of new companies in our state. Since the creation of 1871, Chicago has been named one of the top ten technology startup hubs in the world, and 1871 was named the best incubator in the world. JB is committed to helping entrepreneurs and small businesses get started and grow all across our state. A staunch advocate for righting historic wrongs and fighting discrimination, JB has stood against hatred and bigotry throughout his life. JB was a key supporter of the Center on Wrongful Convictions at Northwestern University. The Center has become a national leader fighting to reform our criminal justice system, helping the accused prove their innocence. He also served as Chairman of the Illinois Human Rights Commission. As chairman, JB stood up for the rights of the disadvantaged, fighting for victims of gender, racial, religious, and sexual orientation discrimination and working to ensure people with disabilities have equal access to jobs and housing. JB and his wife, MK, celebrated their 25th wedding anniversary in 2018, and they are the proud parents of a daughter, Teddi, and a son, Donny. 3 AL OF THE STAT OF ILLINO AUG. 26 1818#5State of Illinois Presenting Team Anne Caprara, Governor's Chief of Staff Ms. Caprara recently served as campaign manager for JB Pritzker and Juliana Stratton's gubernatorial campaign. Caprara is a political professional with over 17 years of experience in Democratic campaigns and legislative offices. Caprara has managed and consulted with candidates and elected officials at every level of state and federal government. Caprara served as chief of staff to Congresswoman Betsy Markey from 2008 until 2010. Before that, Caprara served as Chief of Staff for Ohio Congresswoman Betty Sutton. Caprara also served as political director of the Democratic Senatorial Campaign Committee and Executive Director of Priorities USA during the 2016 election cycle. She obtained her Masters degree from George Washington University and her undergraduate degree from American University. Dan Hynes, Deputy Governor Mr. Hynes recently served as senior adviser to the Governor's transition committee and as a senior executive at UBS Asset Management in Chicago, following a distinguished 12-year career in public service as the Comptroller for the State of Illinois. Hynes was elected Comptroller in 1998 as the youngest state constitutional officer since World War II. He was re-elected in 2002 and 2006 by wide margins. In 2011, President Barack Obama named Hynes as the United States Observer to the International Fund for Ireland, which makes investments in Northern Ireland for the purpose of promoting peace and stability in the region. He received his Juris Doctor from the Loyola University School of Law and Bachelor of Arts in Economics from the University of Notre Dame. Alexis Sturm, Director of the Governor's Office of Management and Budget Ms. Sturm, who joined GOMB as director in January 2019, has over 20 years of experience in Springfield working on state fiscal policy, debt management, and administration. Most recently, she was the director of cash management and bond reporting for the Office of the Comptroller. She previously worked at GOMB. From 2015 to 2017, she served as chief of staff and deputy director for debt, capital, and revenue and from 1997 to 2004, she worked in senior roles in debt management and revenue and economic analysis. From 2004 to 2015, Sturm served as director of research and fiscal reporting and senior fiscal advisor for the Office of the Comptroller. She received her Bachelor of Arts in Economics from Miami University and a Master of Arts in Economics from Washington University in St. Louis. Kelly Hutchinson, Director of Capital Markets Ms. Hutchinson joined GOMB as Director of Capital Markets in November of 2015. Prior to her current position, Ms. Hutchinson worked as Director and Chief Compliance Officer at a nationally- ranked financial advisory firm for over 10 years, advising large municipalities. She also worked in investment banking for several years. Ms. Hutchinson received her Bachelor's degree from Pomona College and her Juris Doctor from Tulane University Law School. Cameron Mock, Chief of Staff and Senior Fiscal Advisor Mr. Mock is Chief of Staff to the Governor's Office of Management and Budget (GOMB) and Senior Fiscal Advisor to the Deputy Governor. Previous to this role, he served as Senior Policy Advisor for Chicago Public Schools (CPS). Prior to joining CPS, Mr. Mock advised the Michigan Senate on education finance, economics and revenue, at the Senate Fiscal Agency and later joined GOMB in Illinois as Budget Manager. He received his BA in Political Science Pre-Law, with a minor in Philosophy & Law, and his Master of Public Policy (MPP) from Michigan State University, specializing in economics and public finance. 4 AL OF THE STAT OF ILLIN AUG. 26 1818#6Illinois' Strong and Diverse Economy AL OF THE STAT ILLINOIS AUG. 26 1818#7The State's Credit Fundamentals Continue to Improve 5 Inherent Credit Strengths Sovereign State with significant revenue flexibility Illinois' economy is the 5th largest in the United States and 19th largest worldwide ✓ Statutory provisions give priority to debt service over other State expenditures ✓ GO Bond debt service has a continuing appropriation, insulating it from political debates ✓ Debt service is limited to no more than 7% of General Funds and Road Fund Appropriations, unless waived by the Treasurer, the Comptroller, or by Statute As of March 1, 2019, the 2011 pension bonds are paid off, reducing pension general obligation bonds debt service by $953 million and providing significant financial flexibility The State recently terminated all of its variable rate debt and associated interest rate swap agreements AL OF THE STAT OF ILLINO AUG. 26 1818#8✓ Illinois' Strong Economic Foundation Strong and Diverse Economy ✓ Broad employment base with no industry accounting for more than 20% Illinois is well-positioned for long- term stability through economic cycles State's diversified economy is a major attraction for workers and recent graduates across the nation Mining, Logging, Information and Construction Other Services Finance 6% 6% 3% Expansive Transportation Network The State is home to the 2nd and 25th busiest U.S. airports in O'Hare and Midway O'Hare is the Best Connected Airport in the US according to MIT's Airport Connectivity Quality Index Illinois is the only state where all 7 class I railroads in the United States operate. Train transit ridership is up nearly 54% over the past decade Five Major Trucking Routes Intersect in the State Highly Educated Population Illinois is home to top ranked universities bringing talented and educated individuals to the State 32.3% of Illinois residents have college degrees, well above the US at 29.8% and the Great Lakes States at 26.2% ILLINOIS TERN UNI UNT ERSITY UNIVERSITY OF CHI 6 Manufacturing 9% Leisure and Hospitality 10% Government 14% Trade, Transportation and Utilities 20% Professiona 1 and Business Services 16% Education and Health Services 15% LOYOLA UNIVERSITY CHICAGO 1851 1890 OLLEGE DEI GLORIAMS THAT THEY WHEATON COLLEGE VITON MASS esse 1890 1870 FOREM AD MAIOR vider Annual Freight Tonnage By Mode -U.S. Class I Railroad -Inland Waterways -National Highway System Volume Scale (Tons/Year) 250000000 125000000 2500000 UIC SIU CARBONDALE NIU Northern Illinois University WESLE SCENTON SAHENTIA 1850 TUTE 心の #1 Best connected airport in the U.S. according to MIT's Airport Connectivity Quality Index 1890 GLOGY AL OF THE STAT OF ILLINO AUG. 26 1818#9Illinois' Robust Economic Indicators Per Capita Personal Income¹ Average Non-farm Employment and Unemployment 1,2 $54,000 2017 $54,203 6,250 $52,000 $50,000 $51,640 $48,2459 $48,000 $46,000 $44,000 Employment (Thousands) 6,200 6,150 6,100 6,050 6,000 $42,000 5,950 $40,000 5,900 $38,000 5,850 $36,000 5,800 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Illinois United States Illinois Real GDP³ Millions of Chained 2012 Dollars 12 10 8 Co + 2 Unemployment Rate (%) Employed IL Unemployment Rate National Unemployment Rate 750,000 740,000 730,000 720,000 710,000 700,000 690,000 680,000 670,000 660,000 650,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Per capita income is ranked first among the Great Lake Region and third among the 10 largest states ✓ Employment trends have improved over the past decade and remain strong ✓Illinois' economy continues to grow, with State GDP ranking 1st in the Great Lakes Region, 5th in the nation and would rank as the 19th largest in the world 7 Source: Bureau of Economic Analysis; Bureau of Labor Statistics; U.S. Census Bureau Note: 1. YTD averages 2. As of 3/2019, not seasonally-adjusted 3. Bureau of Economic Analysis, 3/2019. AL OF THE STAT OF ILLIN AUG. 26 1818#10Budget AL OF THE STAT ILLINOIS AUG. 26 1818#118 Fiscal Year 2020 Budget - Meeting the Challenges of Illinois' Third Century The proposed fiscal year 2020 budget lays out a path to restore Illinois to a place of fiscal and economic health. ✓ Restore Economic and Budgetary Stability ✓ Implement a fair income tax system ✓ Stabilize pension funding ✓ Eliminate structural deficit ✓ Create a World Class Education System Accessible to All ✓ Invest in our children from cradle to career Invest in the higher education infrastructure Strengthen Illinois' Social Safety Network ✓ Assist the state's most vulnerable ✓ Reform the Criminal Justice System and Invest in Public Safety Rebuild and Expand Illinois' Infrastructure ✓ We need to do more than just fix what's broken ✓ Invest in roads, facilities and broadband ✓Make Illinois a World Leader/Competitive in a Global Economy AL OF THE STAT AUG. 26 1818 OF ILLINOI#129 FY 2020 All Funds: $77.0 Billion General Funds 48.0%. Bond Financed By Fund Category Special State Funds 32.3% Education 19.4% Funds 0.0% Federal Trust Funds State Trust. Highway Debt 11.2% Healthcarel 32.6% Funds 0.7% Funds 3.1% Service Funds 4.6% By Result Area Environment. and Culture 0.5% Human Services 13.7% Government Services 12.5% Pensions 10.0% Economic Development 6.5% Public Safety 4.9% AL OF THE STAT OF ILLINO AUG. 26 1818#1310 FY 2020 General Funds Revenues: $38.9 billion Federal Statutory Transfers In Sources 9% 5% Other Taxes and Fees 10% Expenditures: $38.75 billion Income Taxes 54% Pensions 19.4%- Sales Taxes 22% Education 27.5% Economic Development. 0.1% Environment/ and Culture 0.2% Healthcare 17.0% Human Services 16.3% Government Services Statutory Transfers Public Safety 4.7% 7.0% 7.7% AL OF THE STAT OF ILLINOI AUG. 26 1818#14FY2019-2020 General Funds Revenues Summary General funds revenues are estimated to total $38.9 billion, a $1.493 billion, or 4.0%, increase from FY2019 revised base estimates. The FY2020 projection reflects the impact of the revenue changes outlined on slide 20. ✓ New Medicaid program related revenues, plus a portion of the overall cigarette tax revenues, will be deposited directly into the Healthcare Provider Relief Fund, outside of the general funds. In addition, there is a proposed Delinquent Tax Payment Incentive Program estimated to accelerate $175 million into FY2020. Resources: $ in millions Estimated Projected % FY 2019 FY 2020 increase increase Net Individual Income Taxes 18,251 18,851 600 3.3% Net Corporate Income Taxes 2,207 2,338 131 5.9% Net Sales Taxes 8,229 8,537 308 3.7% All Other Sources 3,448 3,807 359 10.4% Total State Sources: Revenues 32,135 33,533 1,398 4.3% State Sources: Transfers In Lottery 731 745 14 1.9% Riverboat Gaming Taxes Other Transfers Total State Sources: 263 258 (5) -1.9% 1,061 820 (241) -22.7% 34,190 35,356 1,166 3.4% Federal Sources Total, Base Revenues Interfund Borrowing Total Resources* 3,220 3,547 327 10.2% 37,410 38,903 1,493 4.0% 250 37,660 (250) 38,903 1,243 3.3% *FY2019 resources here do not include the $700 million from Treasurer's investment program, nor the estimated $600 million deposit from a proposed backlog borrowing and the impact that borrowing might have on federal receipts. See the Budget Book for additional details on FY2019 revised budget estimates. 11 AL OF THE STAT OF ILLINO AUG. 26 1818#15FY2019 2020 General Funds Expenditures Summary The proposed FY2020 General Funds budget has estimated expenditures totaling $38.748 billion. Proposed expenditure increases reflect Governor's priorities of education and human services spending. ✓ Proposed budget includes a shift of Medicaid spending to Healthcare Provider Relief Fund to align with new revenues deposited to the fund. Allows HFS to better manage program cash flow. Expenditures: Budget Categories ($ in millions) $ Change %Change from FY19 FY20 Proposed from FY19 Estimated Budget Estimated FY19 Estimated General Funds Appropriations: Education (ISBE/Higher Ed) Economic Development 10,173 62 10,804 631 6.2% 56 (6) -9.7% Public Safety 1,735 1,855 120 6.9% Human Services 5,906 6,448 542 9.2% Healthcare (Medicaid) 7,930 7,228 (702) -8.9% Environment and Culture 59 59 0.0% Government Services 3,390 3,417 27 0.8% Pensions 7,478 7,124 (354) -4.7% Unspent Appropriations Operating Budget (1,050) (975) 75 35,684 36,016 333 0.9% Interfund Borrowing Repayment Statutory Transfers/Debt Service Supplemental Appropriations* 60 85 25 41.7% 3,092 2,646 (446) -14.4% 473 (473) Total Estimated Expenditures** 39,309 38,748 (561) -1.4% *Supplemental Appropriations include the potential range of estimated liability for retroactive step increases for AFSCME employees. FY19 Public Safety and Human Services expenditures would be significantly higher if the supplemental appropriations were allocated to those lines. **FY2019 numbers exclude impact of repayment of the Treasurer's Investment Borrowing program. See the Budget Book for additional details on FY2019 revised budget estimates. 12 AL OF THE STAT OF ILLINO AUG. 26 1818#16($ millions) RESOURCES State Sources: Revenues STATE OF ILLINOIS GENERAL FUNDS FINANCIAL WALK DOWN GOVERNOR'S OFFICE OF MANAGEMENT & BUDGET Final FY 2018 Estimated Projected FY 2019 FY 2020 Net Individual Income Taxes Net Corporate Income Taxes 17,725 18,251 18,851 2,017 2,207 2,338 Net Sales Taxes Public Utility Taxes All Other Sources 7,810 8,229 8,537 896 868 846 2,555 2,581 Total State Sources: Revenues 31,003 32,135 2,961 33,533 State Sources: Transfers In Lottery 719 731 745 Riverboat Gaming 272 263 258 Other Transfers 917 1,061 820 Total State Sources 32,911 34,190 35,356 Federal Sources 4,032 3,220 3,547 SUBTOTAL, RESOURCES 36,943 37,410 38,903 Interfund Borrowing/Fund Reallocations 802 250 Treasurer's Investment Borrowing 700 TOTAL RESOURCES 37,745 38,360 38,903 EXPENDITURES 1. Education K-12 Education Higher Education 3. Public Safety 9,728 10,173 10,804 7,995 8,385 8,883 1,733 1,789 1,920 2. Economic Development 82 62 56 2,218 1,735 1,855 4. Human Services 6,219 5,906 6,448 5. Healthcare 7,613 7,930 7,228 6. Environment and Culture 60 59 59 7. Government Services 3,244 3,390 3,417 Group Health Insurance Government Services 8. Pensions 1 K-12 Education Pensions State Universities' Pensions 1,858 2,026 2,028 1,386 1,364 1,389 7,014 7,478 7,124 4,107 4,467 4,238 1,414 1,440 1,427 State Employees' Pensions 1,493 1,571 1,460 9. Unspent Appropriations (770) (1,050) (975) Total Operating Budget 35,409 35,684 36,016 Statutory Transfers Out 582 434 364 Debt Service: Capital and Pension Bonds 2,372 1,851 1,208 Debt Service: Backlog Borrowing 527 801 Debt Service: Pension Acceleration Bonds 7 982 92 Interfund Borrowing Repayment 128 60 85 Treasurer's Investment Borrowing Repayment 713 Total Additional Expenditures 3,609 3,865 TOTAL EXPENDITURES 39,018 39,549 2,731 38,748 Comptroller Budgetary Basis Adjustment (167) General Funds Surplus/(Deficit) (1,440) (1,190) 155 Backlog Borrowing Proceeds 2,500 600 Federal Revenue Due to Medicaid Backlog Payments 1,206 166 3,4 Potential Liability from Retroactive AFSCME Step Increases (381) Supplemental Appropriations Needed (92) Adjusted General Funds Surplus/(Deficit) 2,266 (897) 155 6 Revenue Adjustment if Proposed Revenue Enhancements are Not Enacted Appropriation Decrease: 4.0 Percent Cut Across All Agencies Adjusted General Funds Surplus/(Deficit) (1,121) 1,121 1 FY 2019 pension values represent the certified values for the fiscal year. Savings from enacted buyout programs for TRS and SERS will not be known until June. 2 The Governor is proposing a $1.5 billion backlog borrowing to address remaining interest accruing bills, of which $600 million would be estimated to be deposited into the General Revenue Fund. 155 3 The State and AFSCME have been in litigation to determine the amount owed on retroactive step payments. The administration is moving employees to the proper step effective April 1, 2019. The current estimate listed would be the higher end of the potential range for retroactive payments, not including any potential interest owed. Supplemental appropriations would be needed to cover these costs. Appropriations to cover AFSCME step increases in fiscal year 2020 are reflected in each of the agency lines. See Table I-C for details on fiscal year 2019 supplementals needed. The Governor is proposing new revenue enhancements and adjustments totaling $1,121 million. If these changes are not enacted, an equal amount of cuts must be applied. A 4.0 percent cut across agencies, excluding pensions, debt service, and group health insurance, would be required. 6 2,266 (897) General Fund Summary FY2018 – FY2020 Projections The proposed FY20 budget projects a budgetary surplus of $155 million. Table from FY20 Budget Book. AUG. 1818 3. 261#17Fiscal Stabilization AL OF THE STAT ILLINOIS AUG. 26 1818#18A Path Toward Fiscal Stability Illinois' recent fiscal history is one of instability and uncertainty. The budget impasse in FY2016 and FY2017 damaged the State's reputation and relationship with entities dependent on state payments. ✓ The backlog increased from $5 billion at the beginning of the impasse to a peak of $16.7 billion. ✓ Late payment interest penalties from the impasse exceed $1.25 billion. Illinois will continue to face structural deficits, including an estimated deficit of $3.2 billion in FY2020. ✓ Structural deficits cannot be addressed by spending cuts. alone. ✓ Revenue adjustments and a different approach to the payment of the state's pension contributions are necessary. 14 AL OF THE STAT AUG. 26 1818 OF ILLINO#19A Call for a Fair Income Tax System Illinois' current tax structure is unfair and unsustainable. Illinois' fiscal health depends on the passage of a constitutional amendment to allow for a fair income tax system. Thirty-three states and the federal government have graduated income tax rates based on varying income levels. Only nine states tax income at a single rate. According to the Institute on Taxation and Economic Policy (ITEP), Illinois has the eighth most regressive tax system in the country. The lowest 20 percent of earners pay 6.8 percent of their income in sales and excise taxes while the top one percent of earners pays just 0.8 percent of their income in sales and excise taxes.1 OR ID States with Graduated Income Tax Systems MT MN WI VT ΝΗΠΙ WY NE IA PA OH UT IL IN MA CO KS MO RI KY AZ OK NM AR NJ AL GA DE MD DC HI Graduated Income Tax States 15 1 https://itep.org/illinois/ AL OF THE STAT OF ILLINO AUG. 26 1818#2016 Basic Options for Addressing the State's Fiscal Challenges Option 1: Across the Board Cuts Illinois would cut its discretionary spending by 15 percent. Discretionary spending includes: K-12 education Universities and community colleges. State Police Social service agencies Option 2: Flat Tax Increase Illinois would raise the flat tax rate from 4.95 percent to 5.95 percent · meaning that every family in the state would pay higher taxes. For example, a single mom making $61,000 would pay an additional $521 in taxes. Option 3: Fair Income Tax Illinois would change its. system so the wealthy pay more, like in 33 other states. 97 percent of taxpayers would have a lower tax bill, while those making more than $250,000 would pay more and generate $3.4 billion in additional revenue. The same single mom would pay $271 less, a difference of $792 compared to Option 2. AL OF THE STAT OF ILLIN AUG. 26 1818#21Fair Income Tax Elements ✓ Filers at or below $250,000 – 97% of taxpayers - will have lower tax bill 20% increase in current property tax credit against state income taxes ✓ Credit goes from 5% of property taxes paid to 6% of property taxes paid (estimated value $100 million) $100 per child Child Tax Credit for: ✓ Single filers under $80K (phase-out starting @ $40K) Joint filers under $100K (phase-out starting @ $60K) Top rate of 7.95% once income exceeds $1.0 million ✓ Once income reaches $1.0 million, entire income is taxed at 7.95% rate ✓ Corporate income tax rate to match top individual income tax rate (7.95%) 17 AL OF THE STAT OF ILLINO AUG. 26 1818#2218 Fair Income Tax Rates Proposal Single & Joint Filers Fair Income Tax Proposal Rates (Without Credits) Marginal Rates Net Income Level % of IL Taxpayers 8.50% Households 8.00% 4.75% $0-$10,000 27.2% Seeing Tax Relief 4.90% $10,001 - $100,000 58.9% 7.50% 7.95% (97% of IL) 7.02% 6.92% 6.80% 4.95% |$100,001 - $250,000 11.1% 7.00% 6.63% 7.75% $250,001 - $500,000 1.9% 7.85% $500,001 - $1,000,000 0.6% Tax Rate 6.50% 6.00% 7.95% Over $1,000,000 0.3% In addition... 97% of earners get tax relief 20% Increase in Property Tax Credits $100 Per Child Tax Credit 5.50% 5.00% 4.75% 4.50% 4.88% 4.92% 6.07% 6.40% 5.54% 4.00% 5,000 85,000 165,000 245,000 325,000 405,000 485,000 565,000 645,000 725,000 Filer Net Income 805,000 885,000 965,000 Effective Rate 1,045,000 1,125,000 1,205,000 AL OF THE STAT OF ILLINO AUG. 26 1818#23Path to a Fair Income Tax System Legislative Action • Constitutional amendment must be approved by three-fifths of the members of both chambers. 19 General Election Once approved, the amendment would be put to the voters for the November 2020 election. Voter Action Statutory Changes Revenue Collection • Amendment becomes effective if approved by either 60% of those voting on the amendment or a majority of those voting in that election. • Income tax rates would be passed in separate legislation with the implementation contingent on the passage of the constitutional amendment. • If approved by voters, fair tax could be implemented as early as January 2021, providing a half year of additional revenue to the state in fiscal year 2021. AL OF THE STAT OF ILLINO AUG. 26 1818#2420 Proposed revenue changes will enable the state to fund essential services now... Facing the structural deficit and knowing that a fair tax cannot be implemented before FY2021, Governor Pritzker recognizes that additional revenues will be needed in FY2020. Close Corporate Tax Loophole: Decouple from Federal Tax Credit for Repatriated Corporate Income $94M Additional Revenues to Support Medicaid: E-Cigarettes $10M Cigarette Tax Increase - $55M MCO Assessment - $390M Identify New Revenue Markets: Sports Wagering $212M Recreational Cannabis - $170M Plastic Bag Tax - $20M In addition, there is a proposed FY2020 Delinquent Tax Payment Incentive Program estimated to accelerate $175 million. $1.121B Changes to existing rate structures: Phase out Private School Scholarship Credit - $6M Create Progressive Tax Structure for Video Gaming - $89M Cap retailers discount - $75M AL OF THE STAT OF ILLINOI AUG. 26 1818#2521 Pension Debt The State's Biggest Financial Challenge ✓ Illinois' current pension payment schedule follows the plan set forth Projected State Retirement Contributions 1994 est. vs 2018 est. ($ millions) in 1994, 25 years ago. ✓ After the original ramp $20,000 ended in FY2010, the $18,000 schedule assumed gradual growth in $16,000 pension payments. However, the impact of $14,000 recessions on asset values and changes to the systems' actuarial assumptions led to a steeper ramp in payments even with the addition of Tier 2. Appropriations for state $12,000 2003 Pension $10,000 Bonds $8,000 $6,000 $4,000 pensions have grown on average by 9% ($500 million) annually since FY2010. $2,000 $0 FY2020 certified contributions are $4.2 billion higher than originally estimated when 90% by FY2045 target date was set in FY1995 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1994 Projections 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Actual Payments 2018 Estimates AL OF THE STAT AUG. 26 1818 OF ILLIN#26Sustaining the Pension Systems A Five-Tiered Approach The Governor's approach to pension stabilization, taken collectively with the expansion of the tax revenue base and the ongoing investment in priorities that will grow our economy, will put the state on a sustainable path that keeps its promises to retirees. 1) New dedicated revenue from the fair income tax on top of certified amounts 2) Extend the current pension buyout program 3) Infuse the systems with additional assets from the issuance of new pension funding bonds of $2 billion Establish two task forces: Pension Asset Value and Transfer Task Force and a Pension Consolidation Task Force 5) Restructure the pension debt to make payments more sustainable by modestly extending the target date to fiscal year 2052 22 AL OF THE STAT OF ILLINO AUG. 26 1818#27Debt Overview AL OF THE STAT ILLINOIS AUG. 26 1818#2823 Security for Illinois General Obligation Bonds Security The full faith and credit of the State is pledged for the punctual payment of principal and interest under the General Obligation Bond Act (the "Bond Act") of the State The State can draw from all State funds in the State Treasury that are not restricted by law to another use if needed to pay debt service on GO bonds Statutorily Mandated Debt Service Set Asides (GOBRI) Under the Bond Act, monthly transfers are made from various State funds to the General Obligation Bond Retirement and Interest Fund (GOBRI), in amounts sufficient to pay the next interest and principal payments when due, which effectively results in the State transferring 1/12th of the next principal payment and 1/6th of the next interest payment every month GOBRI is a separate fund in the Treasury that is dedicated to the payment of debt service on GO bonds and short-term debt Appropriation of Funds Additional Protection under Illinois Constitution and State Laws • The Bond Act requires the Governor to include an appropriation in each annual budget of monies in an amount necessary to pay all principal and interest due and further requires the General Assembly to make appropriations annually to pay debt service on outstanding GO Bonds from GOBRI • In the absence of appropriations, the Bond Act itself constitutes an irrevocable and continuing appropriation of all amounts necessary to pay principal and interest Principal and interest on all outstanding GO Bonds must be paid even in the absence of a State budget • The Bond Act explicitly provides bondholders the remedy to sue the State to compel payment of GO bonds The provisions of the Bond Act, pledging the full faith and credit of the State to GO bonds issued thereunder, are by their terms irrepealable to any outstanding GO bonds The Illinois Constitution contains a "non-impairment" clause that prohibits action by the General Assembly that would, under contract law, impair the obligations of a contract between the State and its bondholders AL OF THE STAT OF ILLIN AUG. 26 1818#29• $Billions 1.0 0.5 0.0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 ◆ 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Average life of all outstanding GO Bonds is approximately nine years. General Obligation Debt Service¹ Current Par Outstanding Debt service declines Bill Backlog Bonds $5.5 billion 4.5 4.0 3.5 3.0 2.5 2.0 1.5 in FY2020 by approximately $1 billion after the final 2011 pension notes are paid off in March 2019 Capital Improvement and Refunding Bonds $13.3 billion Pension Bonds Total $9.0 billion $27.8 billion General Obligation Bond Overview • General Obligation bonds are backed by the full faith and credit of the State. ⚫ There is a continuing appropriation in place to ensure bond repayment without action by the General Assembly. GOBRI is a separate fund in the Treasury that is dedicated to the payment of debt service on GO bonds and short-term debt. Segregation of funds for debt service begins 12 months in advance for principal payments and 6 months in advance for interest payments. • As of September 2018, all of the State's outstanding debt is fixed rate, with no variable rate debt or interest rate swap agreements. 100% Fixed Rate 2041 2042 2043 24 1. As of March 2019 AL OF THE STAT AUG. 26 1818 OF ILLIN#30Strength of the State's GO Pledge • Monies are transferred monthly to the GOBRI Fund and, by law, are used for the payment of GO Bonds issued under the Bond Act and for the payment of Short-Term Debt. The Bond Act constitutes an irrevocable and continuing authority for and direction to the Treasurer and Comptroller to make the necessary transfers to the GOBRI Fund. The State can draw from all State funds in the State Treasury that are not restricted by law to another use if needed to pay debt service on GO bonds. The Governor's Proposed FY2020 Budget estimates $2.3 billion in transfers from the General Funds to GOBRI in FY2020, with the Balance expected from other State funds. = In FY2020, the State transfers will average approximately $190 million a month from General Funds to GOBRI after the issuance of the Series A Pension Acceleration Bonds.³ As of March 1, 2019, $1.0 billion was available in GOBRI. Fiscal Year End All Fund Cash Balances¹ Transfers to the GOBRI Fund ($Millions)2 2019 2020 2016 2017 2018 Est. Proj. 12.0 $12 $12 $11 $12 $9 General Revenue Fund $10 10.0 8.0 Capital Bonds Pension Bonds 1,423 1,609 $557 $626 $797 $608 1,576 $500 1,243 708 $Billions Section 7.6 Bonds 527 801 982 6.0 Pension Acceleration 7 92 4.0 GRF subtotal $1,979 $2,235 $2,899 $2,659 $2,282 Road Fund 334 305 349 339 338 2.0 School Infrastructure Fund 212 115 172 157 154 0.0 2013 2014 2015 2016 2017 2018 Capital Projects Fund TOTAL 533 477 285 481 633 $3,057 $3,133 3,706 $3,637 $3,407 1. Does not include Federal Trust Funds. Includes GOBRI. June 30, 2016 balance show an increase from FY 2015 due in part to the late enactment of FY 2016 appropriations for many State funds. 2. Does not include debt service transfers on short-term debt as may have been from time to time outstanding 3. This figure does not take into account the impact of the refunding 25 AL OF THE STAT OF ILLIN AUG. 26 1818#31Plan of Finance AL OF THE STAT ILLINOIS AUG. 26 1818#32Taxable Series of April 2019A - Pension Acceleration Bonds Use of Proceeds Security Financing Overview The Bonds are being issued to fund the Pension Buyout Program and the AAI Reduction Program (see next slide). The Bonds are direct, general obligations of the State and, pursuant to Section 9(a) of Article IX of the Illinois Constitution and the General Obligation Bond Act of the State of Illinois, as amended (the "Bond Act"), the full faith and credit of the State is pledged for the punctual payment of interest on all bonds issued under the Bond Act, including the Bonds, as it comes due and for the punctual payment of the principal of all bonds issued under the Bond Act, including the Bonds, at maturity, or on any earlier redemption date, and redemption premium, if any. These provisions are irrepealable until all bonds issued under the Bond Act, including the Bonds, are paid in full as to both principal and interest. Amortization April 1 Series B 2020 12,000,000 2021 12,000,000 2022 12,000,000 2023 12,000,000 2024 12,000,000 2025 12,000,000 2026 12,000,000 2027 12,000,000 2028 12,000,000 2029 12,000,000 2030 12,000,000 2031 12,000,000 2032 12,000,000 2033 12,000,000 Interest 2034 12,000,000 Payment Dates April 1 and October 1, commencing October 1, 2019 2035 12,000,000 2036 12,000,000 Mode Fixed Rate Bonds 2037 12,000,000 2038 12,000,000 2039 12,000,000 2040 12,000,000 2041 12,000,000 2042 12,000,000 2043 12,000,000 2044 12,000,000 Total $300,000,000 26 *Preliminary, subject to change. AL OF THE STAT OF ILLINO AUG. 26 1818#33Tax-Exempt Series of April 2019B Refunding Use of Proceeds Security Interest Payment Dates Financing Overview The Bonds are being issued to refund for economic savings certain outstanding general obligation bonds. The Bonds are direct, general obligations of the State and, pursuant to Section 9(a) of Article IX of the Illinois Constitution and the General Obligation Bond Act of the State of Illinois, as amended (the "Bond Act"), the full faith and credit of the State is pledged for the punctual payment of interest on all bonds issued under the Bond Act, including the Bonds, as it comes due and for the punctual payment of the principal of all bonds issued under the Bond Act, including the Bonds, at maturity, or on any earlier redemption date, and redemption premium, if any. These provisions are irrepealable until all bonds issued under the Bond Act, including the Bonds, are paid in full as to both principal and interest. March 1 and September 1, commencing September 1, 2019 Amortization* September 1 Series A 5,500,000 2020 2021 16,610,000 2022 16,635,000 2023 16,660,000 2024 16,045,000 2025 23,830,000 2026 6,545,000 2027 42,995,000 2028 5,570,000 Total $151,990,000 27 Mode Fixed Rate Bonds *Preliminary, subject to change. AL OF THE STAT OF ILLINO AUG. 26 1818#3428 Tentative FY 2019 – FY 2020 Bond Sale Issuance Schedule April 2019- GO Pension Acceleration Bonds $300M and Current Refunding - $152M August 2019 - $600M GO capital bonds /$700M GO pension acceleration bonds March 2020 - $2B pension funding bonds - GO or new credit June 2019- GO Backlog Borrowing - $1.5 billion January 2020 - $500M GO capital bonds GO stands for General Obligation. Note: Outlined is the projected bond sale issuance schedule; project related bond sales reflect current capital project needs. The state will seek legislative authority to issue the March 2020 bonds as individual income tax (IIT) revenue bonds to achieve more favorable pricing and demand from investors. Please note all par amounts are preliminary and subject to change. AL OF THE STAT OF ILLIN AUG. 26 1818