CHICAGO –Illinois Gov. Pat Quinn and legislative leaders have reached a tentative agreement to shore up the state’s balance sheet by raising the income and cigarette taxes and leveraging a portion of the new revenue to borrow $8.5 billion to pay off overdue bills. The plan also anticipates borrowing $3.7 billion to cover the state’s fiscal 2011 pension payment.
The agreement announced late Thursday followed several days of closed-door meetings between Quinn and state Senate President John Cullerton, D-Chicago, and House Speaker Michael Madigan, D-Chicago. It comes as the state is facing a $13 billion deficit that is expected to grow to up to $15 billion going into fiscal 2012 which begins July 1st.
“This is an outline,” Cullerton cautioned in an interview with reporters posted on CapitolFax.com. “The governor is still meeting with caucuses right now and there could be some tweaks to it.”
In defending the plan, Cullerton said: “We are in desperate need” to pay our bills and “our credit rating would be dramatically improved and we would then have a balanced budget.”
The tentative agreement calls for the state’s personal income tax to rise to 5.25 % from 3% for four years after which it would drop to 3.75%. The corporate rate would increase to 8.4% from 4.8% for four years and then fall to about 6%. The tax on cigarettes would rise by $1.
The income tax increase would raise $6.2 billion annually for the first four years and the corporate tax increase another $1 billion while the cigarette tax would generate $377 million annually. The revenue generated by the cigarette tax would go to education funding.
A quarter percent of the income tax increase would fund property tax relief while a half percent of the increase would be leveraged to issue $8.5 billion of debt in order to pay off a growing backlog of bills. The debt would be repaid over 14 years, Cullerton said. The state pushed off repayment of more than $6 billion in fiscal 2010 bills to fiscal 2011 to deal with its budget deficit and while those bills were paid off last month, new bills are mounting.
The remaining one and a half percent temporary individual income tax increase – to be imposed for four years -- would raise the estimated funds needed to eliminate the state’s structural budget deficit. Cullerton said over the next three years spending growth would be limited to 1% to put the state back on a path toward matching its ongoing spending with recurring revenues.
The overall deal includes plans to borrow $3.7 billion to cover the fiscal 2011 pension payment. The House previously approved a pension borrowing but it fell short of passage in the House. The Senate previously passed an income tax increase, but it stalled in the House where Madigan said he wanted bipartisan support. Republicans have so far refused to back a tax increase.
It was unclear how soon the plan could come up for a vote. The House is meeting Friday and over the weekend while the Senate is not in session until Monday. Cullerton said the House must act first. A vote is expected before the new General Assembly takes office Wednesday as the Democratic majorities will shrink in both chambers. Quinn is a Democrat.
The state’s credit ratings have sunk over the last two years as it turned to one-time measures to balance its budget as revenues faltered and its unfunded pension liabilities rose. The state’s financial and liquidity crisis has captured national attention. Its backlog of bills was featured prominently in a recent “60 Minutes” segment on states’ financial woes and Pacific Investment Management Co. founder Bill Gross said in a recent CNBC interview he would not buy Illinois bonds.
The negative headlines have driven up the cost of borrowing for Illinois and other issuers here between 50 and 200 basis points and Illinois’ credit default swap rate earlier this week remained the highest among states at 335 basis points.
Moody’s Investors Service rates Illinois’ $25 billion of general obligation bonds A1 with a negative outlook. Fitch Ratings rates them A, with a negative outlook and Standard & Poor’s rates the state A-plus, but has it on CreditWatch with negative implications.
