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Watchdog: Big Bill in Illinois' Cards

CHICAGO — Due to the erosion of its general obligation debt ratings, Illinois will pay $551 million of additional interest costs to retire $9.6 billion of bonds sold between last September and July, a Chicago-based government watchdog organization concluded in a report released Monday.

The Civic Federation of Chicago assigned the price tag following a review of other government issues that carried ratings similar to Illinois before its credit began tumbling 18 months ago as a result of a budget crisis. The report is available at www.civicfed.org.

"Due to Springfield's failure to stabilize Illinois' finances, Illinois residents will pay nearly 21% more for one year of borrowing than they would have if the state had maintained its credit ratings," said federation president Laurence Msall. "This report demonstrates that our state's inability to come to terms with the continuing fiscal crisis has a large and measurable cost."

Fitch Ratings assigns an A and a negative outlook to the state's GO debt. Moody's Investors Service assigns an A1 and a stable outlook. Standard & Poor's rates the state A-plus, but has the credit on negative watch. Only California is currently rated lower among the states.

When Gov. Pat Quinn took over after the General Assembly removed Rod Blagojevich from power in January 2009 following his arrest on federal corruption charges, Fitch had recently downgraded the state to AA-minus from AA.

Standard & Poor's had also put the state's AA long-term rating on negative CreditWatch.

Moody's, which rated Illinois Aa3, then stripped the state of its top short-term credit marks.

Analysts have repeatedly downgraded the state as lawmakers have turned primarily to one-time maneuvers to deal with mounting expenses and poor revenue collections.

A $12 billion to $13 billion deficit looms in the next fiscal year.

The federation's Institute for Illinois' Fiscal Sustainability compared the yields of better-rated credits that sold debt in similar market conditions with a similar structure, including tax-exempt and taxable Build America Bonds.

The analysis looked at the results of the state's 12 tax-exempt and BAB issues between Sept. 16, 2009, and July 14, 2010, that included new-money and refunding bonds, GO debt, and sales tax-backed revenue bonds.

The federation's review incorporates the 35% federal interest rate subsidy on BABs in its comparative analysis.

The level of issuance marks the second-highest amount of debt sold over a 12-month period in Illinois' history. It trails 2003, when the its borrowing levels skyrocketed due to its $10 billion GO pension bond sale.

More than half of the added interest costs will be paid through 2015, due in part to the state's issuance of $3.5 billion of five-year bonds to cover its fiscal 2010 pension payment, adding to the fiscal pressures going into the next fiscal year.

The federation called on the state to act to stabilize its finances, especially given additional borrowing plans in the current fiscal year.

The state intends to sell up to $1.75 billion of tobacco bonds later this year and will issue additional new-money debt next year to support the $31 billion capital budget.

Quinn is also expected to resurrect early next year his failed plan to sell $3.7 billion of GOs to cover much of the state's fiscal 2011 pension payment. "The failure of Illinois government to stabilize its finances means Illinoisans will be forced to pay more for their government while it delivers fewer services," Msall said.

The analysis acknowledges that the state's borrowing costs are lower now than when it carried higher ratings because of the drop in interest rates in the municipal market.

But it notes that Illinois could have benefitted more from the decline if it had staved off a series of downgrades that have forced it to pay a premium to access the market.

State debt manager John Sinsheimer said he read the report and has no quarrel with the assessment that Illinois has paid a premium, but he questioned how the federation arrived at the $551 million figure, suggesting it is flawed to directly compare a large Illinois issue to a small one from another government.

The report also fails to take into account the benefits of the infusion of the state's new-money borrowing to support its capital program and the state's ability to capture the savings afforded by the BAB program that expires in its current form at the end of the year, Sinsheimer said.

"The investment in school buildings, bridges, and roads is desperately needed in Illinois, along with the 60,000 jobs the investment creates," he said. "I think the report misses that point."

Sinsheimer said the state had extended the deadline to Monday from last Friday on submissions from underwriters, financial advisers, and lawyers interested in a role on the state's upcoming tobacco bond issue.

He hopes to name a team in about two weeks and expects it will take at least eight to 10 weeks after the team is selected to enter the market.

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