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Illinois Gov. Quinn Unveils $52.9B Budget

CHICAGO - Illinois Gov. Pat Quinn yesterday unveiled a $52.9 billion fiscal 2010 budget that calls for higher taxes and fees to help close a record $11.5 billion deficit and fund a long sought $26 billion capital program that relies on $8.6 billion of new borrowing in coming years.

Tentative borrowing plans in the budget include between $8 billion and $12 billion of pension bonding, although interest rates would need to fall and the market stabilize for the financing to work, sources said.

About $2 billion of general obligation and sales-tax bonds would be refunded for savings and restructuring purposes, and about $1.1 billion of new GO bonding would be completed to support the capital budget in fiscal 2010.

Quinn, a Democrat, portrayed the budget as a sacrifice for many that is needed to steer the state through its worst economic crisis in recent memory, ending what he called an era of fiscal irresponsibility and mismanagement.

"Illinois is staggering to pay an $11.5 billion deficit and has a mountain of unpaid bills," Quinn said in his first state of the state and budget address. "Illinois' economy is falling. Unemployment is rising, and our people are hurting. To be direct and honest - our state is facing the greatest crisis of modern times."

"We will restore our state's financial integrity," said Quinn, the former lieutenant governor who took office earlier this year after Rod Blagojevich was removed by office through impeachment proceedings launched after his December arrest on federal corruption charges.

The $11.5 billion deficit includes a $4.3 billion shortfall in the current $49 billion operating budget and another $7.3 billion deficit looming in fiscal 2010 that begins July 1. The deficits are due to dwindling tax collections and increasing health care and other costs.

The all-funds budget includes a general fund spending plan of $28.4 billion. The deficit would be eliminated by tapping $4 billion in federal stimulus funds, and through measures that include cuts, an income tax increase, debt restructuring, dipping into non general-fund accounts surpluses, a cigarette tax hike, and scaling back on scheduled pension fund payments. Another $2 billion in federal funds goes to education and $2.9 billion to speed up Medicaid payments.

The state would cut the deficit by about $1.3 billion through a 2% reduction in grant programs and other spending cuts and belt-tightening moves, such as consolidating leases and increasing the health care contributions required of state employees and retirees. Several tax breaks would end to raise $100 million.

Illinois would raise an additional $2.8 billion in fiscal 2010 from a 1.5% increase in the 3% tax on an individual's income and another $350 million from an increase in the state's corporate income tax rate. The state would offset the impact on lower individual earners by increasing the personal exemption level to $6,000 from $2,000.

"I strongly believe there is a fair and honest way to pay our bills and honor our obligations," Quinn said in defense of his plan, arguing that five million of the state's 13 million residents would see some tax relief under his proposals.

The budget calls for restructuring $2 billion of existing debt to achieve $530 million of savings. Sources said the state was looking at pushing off some near-term payments to later in the current maturity schedule that goes out to 2045 on GO bonds and 2040 on sales-tax backed bonds and refunding for present value savings.

In order to accomplish the restructuring however, lawmakers would be required to remove rules imposed in 2004 that require the state to make level principal payments. Quinn is also asking lawmakers to temporarily suspend, for refunding debt, a rule that requires 25% of the state's debt in any given year be sold competitively.

Faced with a whopping unfunded liability of $73 billion, Quinn wants to trim $2.8 billion off pension payments owed for the current fiscal year and the next while also seeking authorization to sell up to $12 billion of pension obligation bonds if the market improves. The state issued $10 billion of GO pension bonds in 2003.

Under the proposed budget, Illinois will base its contribution on the "normal cost" which represents the present value of the benefits earned by pension plan members while skipping the piece of the payment tied to paying down the unfunded liability. The number was set at $1.5 billion for the pension contribution in Quinn's budget, far short of the $4 billion scheduled payment. Some savings would also be achieved by freezing payments this year.

Under the pension reforms, new hires could not receive full pension benefits until they hit age 67 and the state would no longer recognize combining years of serve and age to qualify employees early for benefits. Benefits would also be reduced for new hires that qualify also for Social Security benefits and new hires would pay 1% less than current contribution rates.

While Republicans and civic groups oppose any pension payment cuts, the governor argues that such a move is warranted given the estimated $162 billion overall reduction in the accrued liability by 2045. The state in 1995 adopted a payment plan designed to bring the pension system to a 90% funded ratio by 2045.

If approved, the new $26 billion capital budget, dubbed Illinois Jobs Now, would end a six-year drought on new capital authorization that federal authorities have warned has jeopardized the state's ability to capture matching federal dollars. Officials expect to leverage $13.5 billion in federal funds as part of the program, with the remainder being paid for with $8.6 billion of mostly GO bonding and local matching dollars.

The capital program would provide $14 billion for the state's roads, bridges, highways, and Interstates; $5 billion for mass transit; $4 billion for education; $2 billion for environmental and energy projects; and $1 billion for economic development projects such as affordable housing, community health care centers, and infrastructure.

To fund the program, Illinois would raise driver license fees by $20 to $10 to raise $20 million and vehicle registration fees would go up $20 to $99 to raise $180 million annually, and raise car title fees. The plan does not rely on a gasoline tax increase that some lawmakers support.

Illinois' revenue picture shows no improvement on the horizon. Income taxes are expected to decline by 6.7% in fiscal 2009 and another 2.2% in the next fiscal year. Corporate income taxes are expected to decline 20.2% in the current fiscal year and 21.8% next year while sales taxes are projected to fall 7.5% this year and by 4.2% in fiscal 2010.

To help make the tax increases more palatable, the budget proposes a 10-day sales tax holiday in August on school-related supplies and clothing at a cost of about $40 million to $50 million to state coffers. Education spending would see a modest increase of $174 million for K-12 and $40 million for higher education.

A cigarette tax increase pushed by Democratic leaders would boost the 98-cent state tax by 50 cents this year and potentially 50 cents next year to raise about $360 million. Proceeds would go to reduce the state's backlog of overdue health-care related bills.

The state's fiscal crisis has already resulted in several downgrades. Standard & Poor's last week knocked the state's GO credit down one notch to AA-minus because officials had failed to take any steps to begin addressing the current year deficit.

The state has outstanding $8.9 billion of non-pension GOs and another $10 billion of pension bonds. Last December, Fitch Ratings downgraded the state to AA-minus. Moody's Investors Service has not acted on its Aa3 rating, but did strip the state of top short-term credit marks in December.

Reaction from lawmakers was mixed with many noting the difficulty of voting for an income tax hike, although leaders had kinder words for Quinn than his predecessor, who clashed with members of both parties. Both the House and Senate are controlled by Democrats.

House Speaker Michael Madigan of Chicago described his working relationship with the governor as excellent, and said of the tax increases: "I would say that before we move forward on any tax increases, Illinoisans want to know how are you going to clean up Illinois government, how are you going to reform government." He endorsed the pension reforms.

Senate Republican minority spokeswoman Patty Schuh called the income tax increase irresponsible.

"There is no way the government should ask taxpayers to pay another cent for a broken down system," she said. "The caucus does give the governor credit for offering some courageous pension reforms, but to calculate a savings from those reforms and then to spend the money starting tomorrow is totally irresponsible."

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