CHICAGO — The pressure on Illinois’ credit eased Friday as Fitch Ratings revised its outlook on the state’s general obligation rating to stable from negative in recognition of moves to raise the income tax by two-thirds and temporarily limit spending increases.
Fitch affirmed its A rating on Illinois’ $25.4 billion of outstanding GOs ahead of next month’s $3.7 billion GO sale to cover fiscal 2011 pension payments. It also affirmed the A-minus rating on state appropriation-backed debt.
“Following several years during which the state was unwilling to take action to restructure its budget to achieve balance and increased reliance on borrowing to close budget gaps, the tax increase and enacted spending limits close a significant portion of the structural gap in the state’s budget through fiscal 2014,” Fitch analysts wrote.
Moody’s Investors Service and Standard & Poor’s have not yet weighed in on the impact of the tax hikes on the state’s credit.
Fitch noted that Illinois still faces a mammoth backlog of bills it will have a tough time addressing unless a borrowing plans is approved. “While the borrowing would add to the state’s growing debt load, the ability of the state to bring its payment obligations more current in a timely manner will be limited without the borrowing,” analysts wrote.
Illinois could issue up to $8.75 billion of GOs to pay off overdue bills under a proposal lawmakers will consider when they convene early next month.
SB 3 resurrects a key piece of the fiscal bailout that was voted down during a lame-duck legislative session earlier this month. Lawmakers approved a two-thirds increase in the income tax and approved borrowing up to $4.1 billion for pension payments, but rejected the $8.75 billion issue to pay off a backlog of bills.
“It’s a key component of our overall plan to restore economic stability. Without it, schools, social service providers, hospitals, and numerous others who rely on state funding or do business with the state will continue to struggle for survival. We owe them the money,” said John Patterson, spokesman for Senate President John Cullerton, D-Chicago, who is sponsoring the legislation.
Authority to issue new debt requires a three-fifths majority of the Senate and House. Democrats hold majorities in both, but lack the supermajority needed to pass the measure without some GOP votes. Republicans have said they are open to reconsidering the plan, but have indicated they want concessions
Under the bill, the debt would be called GO restructuring bonds and could go to pay off bills at least 60 days past due. All of the authorization would have to be tapped by July 1, 2012, and must be repaid within 15 years of its issuance.
Gov. Pat Quinn and fellow Democratic legislative leaders are pushing the measure as a means to leverage $6.8 billion in additional annual revenue officials expect to collect from the tax increase.
Illinois closed out fiscal 2010 owing $6.4 billion in vouchers. At the end of September, it owed about $5.5 billion and could close out the current fiscal year June 30 owing as much at $8 billion as it puts much of its incoming revenue towards debt service that is coming due, according to Comptroller Daniel Hynes’ last quarterly report.
Social services groups last week pressed lawmakers to approve the borrowing as they warned of the dire impact the state’s delays have had on their ability to continue providing services. Though Illinois has paid a premium to access the market over the last year amid ongoing news of its budget and liquidity woes, the state could save money by issuing debt to pay off its bills. That’s because it currently pays a monthly interest rate of 1% to its vendors on bills over 60 days due.
Illinois is already planning a series of bond sales. It intends to sell $1.5 billion in late spring and $2.5 billion in fiscal 2012, which begins July 1, according to debt manager John Sinsheimer. Both will support the $31 billion capital budget. The state will sell up to $4.1 billion of GOs to cover its fiscal 2011 pension-fund payments on Feb. 17.
The Governor’s Office of Management and Budget on Friday released its revenue estimates for the next three fiscal years. They anticipate $36.6 billion in general fund revenue will be collected in fiscal 2012. That figure includes an additional $6.05 billion from the individual income-tax increase and another $770 million from the corporate tax hike. It hinges, however, on the future passage of an increase of $1 per pack in the cigarette tax, which would raise $330 million. The state must limit future general fund spending growth to 2% annually for the three fiscal years after 2012.
Officials anticipate general fund spending of $36.5 billion in fiscal 2012. That includes $4.5 billion for 2012 pension payments, $548 million for debt service on capital bonding, $560 million for debt service on its 2003 pension bonds, $935 million for the 2010 pension bonds and the upcoming 2011 pension issue, and $425 million for debt service should the GO restructuring bonds win passage.