Ill. Budget in Limbo; Tax Hike Rejected

CHICAGO - Gov. Pat Quinn met with the Illinois General Assembly's leaders yesterday, taking his first step aimed at breaking a budget impasse that has left the state with a roughly $7 billion hole in the fiscal 2010 budget after the House's rejection of his income tax increase.

Working overtime throughout the weekend, the General Assembly adjourned after passing Quinn's spending proposals while rejecting the income tax increase and a cut in the state's pension contributions. As a result, the state's available revenue will fund only six months of government operations in the fiscal year that will begin July 1.

Quinn said after meeting that some state service providers would be notified of the possibility of funding cuts. "I think it's important everyone know in advance what the consequences are if we don't come up with a balanced budget."

A second meeting is planned for Thursday.

The rejection of the income tax increase is the first major blow to Quinn, the former lieutenant governor who took office after lawmakers removed his predecessor, Rod Blagojevich, in January after his arrest on federal corruption charges.

In addition to helping eliminate a $12 billion budget deficit, the income tax revenue was part of an overall revenue package Quinn was counting on to repay $2.25 billion of cash-flow borrowing in the current fiscal year to speed up bill repayment and ease cash flow. Those certificates do not come due until late in the next fiscal year. The state issued $1 billion last month and is planning on another $1.25 billion in the coming weeks. It does have $6.1 billion of non-general-fund account surpluses it could tap as a backstop to repay the debt.

The state's cash crunch is having a widespread impact. The Regional Transportation Authority of Illinois was downgraded by Fitch Ratings yesterday one notch to AA-minus, and assigned a negative outlook, because of faltering sales tax collections that repay the agency's debt and its vulnerability to the state for operational and capital funds.

Quinn originally proposed a 50% increase in the state income tax rate, to 4.5%, to generate $2.9 billion for the $52.9 billion spending plan, along with an increase in the corporate rate to raise $350 million. The Senate settled on a revised plan over the weekend that would have raised the rate to 5% and extended the sales tax to various purchases now exempt. The plan lacked House support, and that chamber's members voted on a temporary two-year income tax which failed.

The General Assembly voted last week to make the full scheduled pension payment of $4 billion, rejecting Quinn's recommendation to pay just $1.5 billion, based on the long-term savings expected from his proposal to scale back benefits for new employees. The shift to a two-tiered pension system is still pending.

Lawmakers approved other measures proposed by Quinn to shore up the budget, including the restructuring of $2.2 billion of debt to save $530 million and dipping into non-general-fund accounts for $580 million.

Legislative aides said that given what measures passed and what did not, the state still faces a roughly $7 billion deficit, and the lack of a balanced operating budget leaves its $29 billion capital budget in limbo.

Two weeks ago lawmakers approved a massive new capital program - the first since the 1999 $12 billion Illinois FIRST program - but Quinn has refused to sign the legislation until an operating budget is resolved. After the meeting yesterday, he praised lawmakers for adding $400 million for high-speed rail to the package, calling it a "good thing," and he signaled now might be willing to sign the legislation more quickly.

The capital budget is supported by an initial $3.6 billion general obligation and sales-tax backed borrowing authorization.

Moody's Investors Service lowered the state's long-term GO credit on $19 billion of debt one notch in April, to A1. Fitch rates the state AA-minus but has the credit on negative watch. Standard & Poor's downgraded the state in March to AA-minus.

The failure to adopt a balanced budget by May 31 gives Republicans leverage at the table; a three-fifths majority is now needed for legislation. Before June, a simple majority was needed. Quinn is a Democrat, and Democrats control both chambers.

"We are concerned about how we can change the culture in Springfield on both ethics and budget. That's what we are going to talk about today," Republican House Minority Leader Tom Cross of Oswego said before meeting with the governor. "One of the things we are going to have to talk about is cutting and prioritizing."

Republicans support the pension changes and have not ruled out a tax increase, but they want more spending cuts - above the $1.3 billion proposed by Quinn - before any increases are considered.

In other action, the Senate did not vote on legislation sponsored by House Speaker Michael Madigan, D-Chicago, that would have resulted in the firing of more than 700 employees and board appointees brought in by Blagojevich and former Gov. George Ryan.

Madigan pushed for the legislation, which the House unanimously approved, to speed up the "fumigation" of state government Quinn said he would undertake as governor. Federal prosecutors say Blagojevich used his power to make appointments, hand out state jobs and contracts for personal gains. His predecessor, Ryan, is in federal prison on corruption charges.

The legislature did sign off on first-time caps on campaign contributions - promoted by Quinn in the aftermath of the Blagojevich scandal - but some lawmakers and reform groups called the legislation weak. Annual contributions from individuals were capped at $5,000, and donations from political action committees, business groups and unions were capped at $10,000. A Quinn-appointed reform commission sought lower limits and wanted caps on party in-kind contributions to candidates. Quinn has said he would sign the legislation.

The RTA is preparing to issue $260 million of taxable GO working cash flow notes that carry Fitch's top short-term ratings. Fitch's downgrade applies to $650 million of outstanding GO debt.

The action "reflects the softening sales tax environment ... the authority's operating and capital exposure to the state of Illinois ... and significant capital needs," analysts wrote. The negative outlook reflects the sales tax struggles, substantial operating pressure and the likelihood of continued payment delays at the state level. The RTA is in line to receive about $1.9 billion from the capital budget and $414 million of federal stimulus funds toward its $5 billion five-year capital program.

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