CHICAGO — The Illinois General Assembly adjourned late last week after passing a fiscal 2011 budget that chips away at a $13 billion deficit primarily with one-time maneuvers — including a $1.7 billion tobacco bond financing — and by pushing off $6 billion in bills while leaving a $3.7 billion hole.
The shortfall in the budget that begins July 1 is tied to the state’s next pension payment. The Senate adjourned without voting on Democratic Gov. Pat Quinn’s deficit borrowing proposal to issue $3.7 billion of eight-year general obligation bonds to fund the state’s pension payment. The Democratic-controlled House narrowly approved the borrowing earlier in the week.
The roughly $52 billion budget includes a general fund of $26.2 billion, down slightly from the current fiscal year. The state faced a $13 billion deficit going into the next fiscal year as bills mount.
Revenues continue to lag and debt service is growing as short-term financings come due and past pension bonds must be repaid.
The budget did not include any new debt restructuring as it did last year. The state in mid-June will sell as much as $500 million of junior-lien sales tax-backed Build Illinois bonds that refund outstanding debt for savings that were included in the current budget. Cabrera Capital Markets LLC is the senior manager.
Quinn pressed for the pension borrowing as the best way to help manage through the next fiscal year given lawmakers’ refusal to cut deeply into spending or to raise income taxes in an election year.
In a statement Friday, he praised lawmakers for adopting some benefit cuts, approving a tax holiday on back-to-school sales, and giving him emergency budgeting powers, but he also called on the Senate to adopt the pension financing.
“Our task is not complete, and there’s more that must be accomplished before this session officially ends … I remind members of the General Assembly that the people of Illinois are depending upon their elected officials to promptly and squarely address the serious fiscal issues confronting our state,” he said.
Senate President John Cullerton, D-Chicago, did not call for a vote on the pension bonding bill before adjourning the chamber as it became clear that he was several votes short of reaching the three-fifths majority needed on GO authorizations, even though Democrats hold a supermajority in the chamber.
Lawmakers could return as soon as later this month, though they are not formally scheduled to return until the fall after the November general election.
Quinn faces state Sen. Bill Brady, R-Bloomington, in the race.
“We are going to check everybody’s schedule and make sure we have a date in the future when we can all come back and hope to get some bipartisanship like we did last year,” Cullerton said.
Lawmakers last year approved a $3.5 billion, five-year GO issue to fund the state’s fiscal 2010 pension payment and those bonds were issued earlier this year.
The new measure cleared the House with the support of two Republicans, but Senate Republicans remained united in their opposition.
A Senate Republican spokeswoman called the borrowing irresponsible.
“Senate Bill 3814 authorizes a financing with only interest payments in the first two years and backloads principal payments while the pension bonds Republicans supported last year had level principal,” said Patty Schuh. GOP lawmakers pushed for more cuts and state spending reforms.
Under the legislation approved in the House, the first principal payment of $100 million is due in year three, $300 million is due the next year, $600 million is due in year five, and $900 million is due in years six through eight.
The state is required to use a level principal repayment structure due to debt reforms adopted after the state’s $10 billion GO pension issue in 2003, but an exemption to that law was included in the new pension bonding bill.
Annual pension payments represent a continuing appropriation, so unless legislation is approved granting a holiday, it must be paid at some point during the next fiscal year.
Illinois closed fiscal 2009 with a $62.4 billion unfunded liability in its four retirement funds, for a 51% funded ratio that is considered the worst in the nation among states.
The budget plan leaves unpaid about $6 billion in bills that will have accumulated by the end of the fiscal year on June 30 and it extends to the end of December from the end of August the time frame known as lapse period, during which the state can pay those bills.
The state’s liquidity crisis has contributed to a series of downgrades.
Lawmakers also gave Quinn emergency budgeting powers in SB 3660 that allows the state to sell up to $1.75 billion of bonds backed by its share of tobacco settlement payments.
Under the plan, the state would sell between $1.4 billion and $1.5 billion of 17-year bonds, netting $1.2 billion for the general fund. The tobacco bonds required only a simple majority vote, as they are revenue bonds and not subject to the super majority required for passage of GOs.
Several investment bankers said they were told the state would soon launch a competitive selection process to pick an underwriting team. The state’s debt manager, John Sinsheimer, could not be reached Friday.
The legislation also gives Quinn sweeping powers to cut spending and dip into surpluses of non general fund accounts. No limit was set, but the administration has indicated it would borrow about $1 billion in available funds from those accounts. The state must replenish the funds within 18 months at a 1% interest rate.
Other measures include a tax amnesty program for taxes owed between 2002 and 2009 that is expected to raise $250 million.
Lawmakers and other top officials will take 12 furlough days and see their pay frozen while departments will see a 5% cut in spending on operations at a savings of roughly $400 million.
The budget trimmed education funding by $300 million. Some lawmakers hoped to avoid that cut by approving a $1 per-pack cigarette tax increase but the hike stalled.
Medicaid was cut by $200 million and state contracts will be reviewed for possible savings of $300 million.
Rating agencies have been watching closely to see how Illinois resolves its budget crisis and are likely to view negatively the heavy reliance on one-time measures, like pushing off bill repayment and deficit financings.
Fitch Ratings rates the state’s $23.4 billion of debt A-plus and has the rating on negative watch. Standard & Poor’s rates the state A-plus, but has the rating on negative watch. Moody’s Investors Service rates the state Aa3 with a negative outlook.
In other legislative developments, the General Assembly overwhelmingly voted to reject Quinn’s amendatory veto that had altered some provisions of Metropolitan Pier and Exposition Authority reform legislation that allows the struggling agency to restructure its $2 billion in debt.
The legislation that overhauls the agency that manages Chicago’s McCormick Place Convention Center had strong bipartisan support and was crafted to help reduce convention and trade costs and provide near- and long-term fiscal relief as its tourism taxes are falling short of debt service requirements.
The General Assembly also approved a controversial plan that would allow a portion of sales tax raised in a special district to be diverted for infrastructure improvement to support bonding to aid in the development of a $380 million entertainment and retail project in Marion.
Supporters say the project will create jobs, but opponents worry about the drain on local government and school budgets that would otherwise have received the revenues.
Quinn used his amendatory veto powers on a previous bill, so it is unclear whether the changes have addressed his concerns.