CHICAGO – In its second try yesterday, the Illinois House late Tuesday narrowly approved Gov. Pat Quinn’s proposal to issue $4 billion of general obligation bonds to cover the state’s fiscal 2011 pension payment.
With the state facing a $13 billion deficit and a majority of lawmakers unwilling to cut deeply into spending or to raise income taxes, the Democratic governor and Democratic House leaders pushed the plan as the more affordable alternative to skipping the pension payment.
The measure failed in its first vote as it did when the House voted on a similar proposal earlier this month. The first vote yesterday ended with 70 favoring it, 46 opposed and one voting present. A total of 71 votes – a three-fifths majority – is required, however, for bonding legislation to pass. After caucus meetings, the House reconvened and two Republicans broke ranks so that the measure passed 71-44 with two members voting present.
The Senate earlier this month approved borrowing to cover the pension payment. A pension financing would mark the second consecutive year that the state has used a deficit borrowing for its pension payment. The General Assembly last year approved the issuance of $3.5 billion of five-year GO bonds for the 2010 payment and the state issued that debt earlier this year. The new bill requires the state to borrow by September.
In an effort to pressure Republicans to support the plan, Quinn and House leaders initially on Tuesday sought to attach a series of amendments to the bill tying the pension bonding to at least another $1.5 billion in borrowing for public school construction projects and higher education. They later dropped the amendments.
House leaders pushed the plan as a less costly alternative to taking a pension holiday, given lawmakers’ refusal to cut deeply into spending. “We haven’t the appetite to cut deeply into state spending….so the options are two, we can borrow the money we need to pay the pension systems …or we can walk away from the debt,” said House majority leader Barbara Flynn Curie, D-Chicago. “Borrowing is far cheaper for the taxpayers than is walking away from the obligation.”
Officials contend the interest cost over the next eight years would run about $1 billion on bonds, compared to a long term price tag of $20 billion if the payment were deferred. That’s because the state must pay an interest rate of 8.5% on the amount owed.
Republicans slammed the plan, countering that the General Assembly should instead reform government and cut spending to cover the payment or consider revisiting the pension payment in the next fiscal year. The borrowing “kicks the can down the road,” said Rep. Roger Eddy, R.-Hutsonville.
“We understand we have to make the payment…what we don’t approve of, what we don’t understand is…what have we done in the area of cuts, nothing,” complained House Minority Leader Tom Cross of Plainfield as Quinn stood on the House floor prior to the second vote.
Passage of the pension borrowing clears a significant budget hurdle. Democrats control both the Senate and House but must pass a budget by May 31 or they face an even tougher task because a three-fifths majority instead of a simple majority will be needed to pass a spending plan. The final budget is expected to include some cuts, push off repayment of as much as $6 billion in bills, and could include new revenues from a proposed cigarette tax increase and tobacco financing.
The state 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.
Rating agencies are watching closely how Illinois resolves its budget crisis and are likely to view negatively a 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.
