CHICAGO — Illinois lawmakers entered the homestretch of their annual regular session this week facing a crowded agenda topped by budget questions, including whether to use borrowing to pay down bills — a debate that prompted a threat from the treasurer to call investors and warn them against buying state bonds.
Gov. Pat Quinn’s original $52.7 billion all-funds 2012 budget proposal relied on $8.7 billion of borrowing to pay down a backlog of overdue bills, but it stalled over objections to its size and the establishment of what amounted to a line of credit to help cover operations.
In March, Quinn scaled the proposal down to $2 billion, mainly to address overdue Medicaid vouchers, but that too has languished. Quinn is a Democrat and the General Assembly is controlled by Democrats, but some Republican votes are needed to reach the three-fifths majority to authorize new bonding.
The latest proposal comes from Sen. John Sullivan, D-Rushville, who is attempting to build support for $6.2 billion in borrowing to pay off bills. “Right now we’re using school districts, universities, private companies and health care providers … we’re using them as our credit card,” he said. Like Quinn, he characterized the bonding as a restructuring of existing debt.
The state is also planning to issue between $2 billion and $3 billion of debt in 2011 to support capital projects, though the timing and level of bonding depends on the resolution of a court case before the Illinois Supreme Court.
State Treasurer Dan Rutherford, joining the chorus of his fellow Republicans in the General Assembly opposed to new bonding, warned Monday that he would use his position to drum up bad publicity for the state should it move to issue more debt.
“My position is you can’t borrow any more money, and if I need to send letters to the rating companies to tell them the treasurer of Illinois is opposed to more borrowing, I’m going to do that,” he said.
“If it means I have to let the bond houses know that I agree we are a major risk,” Rutherford said he would do so.
Sullivan called Rutherford’s threats counterproductive because of their potential to drive up interest rates. “Instead of trying to work with us, he’s trying to work against us,” he said.
Under state rules, the treasurer and comptroller — who manages bill payments — must sign off on short-term cash-flow financings. The various bonding proposals from Quinn and the new one from Sullivan don’t fall into the category of cash-flow borrowing because of their extended repayment schedule, so only legislative approval is needed.
Rutherford, who was elected last November to the position overseeing state investments and other fiscal matters, also issued a report on Monday arguing that the state’s growing debt burden and budget deficit make more bonding unaffordable.
Illinois owes a total of $45 billion through 2036 when principal and interest are combined. The government owes a combined $140 billion in unfunded pension obligations, retiree health care unfunded liabilities, and debt service on past pension-related bonding, according to the report.
The report compares state interest rates to other similar borrowers, asserting that Illinois will pay 17% more in interest than Kentucky, 34% more than Michigan, and 41% more than Washington on pension-related issues similar to the state’s issuance.
The report also addresses what investors have called the “Illinois effect” in which issuers — even those with little exposure to state finances — are facing higher interest rates. Rutherford cited Sangamon County’s $10 million sale in March that will cost it between 14% to 17% more in total interest than county deals in Kentucky and Texas.
“When multiplying this halo effect over hundreds of Illinois communities one realizes that scores of Illinois taxpayers will be taking a substantial financial hit twice,” Rutherford said in the report. The report calls on the state to cut spending and curtail new borrowing.
The Office and Budget Management defended its borrowing plans, arguing that interest rates on state paper have dropped by up to 100 basis points from the start of the year and that rating agencies responded with favorable comments following the passage earlier this year of an income tax increase. The tax hike is expected to generate between $6 billion and $7 billion annually in new revenue.
Bloomberg reported that the extra yield on state paper sought by investors has dropped by about 27 % over the last four months.
“Gov. Quinn believes debt restructuring is the best way to pay down our backlog of unpaid bills and boost economic development in Illinois. The governor is working with legislators, chambers of commerce, and businesses and organizations throughout Illinois to pass a plan to provide payment to the state’s vendors immediately and inject billions into our economy,” said budget spokeswoman Kelly Kraft.
Illinois issued $10 billion of debt last year to finance capital projects, restructure debt, and make pension payments. After a series of downgrades, Illinois’ GO bonds are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.
Facing a May 31 adjournment deadline, the House recently adopted a $33.2 billion general fund budget. That chamber’s plan, however, is $1 billion below the plan adopted by the Senate and $2 billion under what was submitted by Quinn earlier this year.
The Civic Federation of Chicago, a tax and fiscal policy review organization, has urged lawmakers to reject much of the budget because it leaves a $2.4 billion operating shortfall and relies too heavily on borrowing.
At the start of the year Illinois faced an estimated deficit of up to $15 billion going into the next budget. The income tax hike cut that figure in half.
Other issues competing for lawmakers’ attention include new legislative maps, pension reform, and an expansion of gambling. Quinn and new Mayor Rahm Emanuel support building a land-based casino in Chicago to raise revenue for the city and state. Authorization paving the way for a casino could be added this week to a gambling package pending in committee.
Lawmakers also hope to reach agreement on a package of pension changes that would require increased payments from employees. Illinois holds the distinction among states of having the lowest funded ratio of 45.4%, with $75.7 billion of unfunded liabilities.
