CHICAGO - Illinois Gov. Rod Blagojevich yesterday unveiled a $58 billion budget for fiscal 2009 that would launch the state on an unprecedented borrowing spree that includes a $1.2 billion tobacco bond issue, the sale of $16 billion in pension bonds, and $3.8 billion of debt in the coming years to fund capital projects.

Blagojevich tailored each of his borrowing plans to meet specific goals in a clear attempt to sell skeptical lawmakers on proposals they have in some cases rejected in the past. The governor also promoted them as a means to stimulate the economy and help the state's long-term fiscal picture amid a looming deficit and gloomy prediction for the coming fiscal year.

"If we make the tough choices elsewhere in our $58 billion budget, we can do these things and strengthen our economy, and we should do it now," Blagojevich told lawmakers in a joint budget and state of the state address Wednesday.

The Democratic governor presented the capital budget - dubbed Illinois Works - as the cornerstone of a larger effort to stimulate the state's economy. It would provide $4.9 billion for kindergarten through 8th grade and higher education, $14.4 billion for roads and bridges, $2.7 billion for transit, $1.1 billion for energy and environmental projects, $1 billion for economic development projects, $600 million for state facilities and $500 million for airports and rail.

The plan relies on the issuance of $3.8 billion of debt that would be repaid with revenue in the state's road fund and from other available sources. Another $7 billion would come from revenue raised from a partial privatization of the state lottery with the remainder coming from matching local and federal funds and spending on a pay-as-you-go basis.

"I like the idea of a capital bill of the size and scope I am proposing because, first and foremost, it means that we will put more than 700,000 people to work," Blagojevich said.

Lawmakers last year rejected a lottery privatization over concerns that the plan failed to name a permanent replacement for the $600 million in profits now generated by the lottery annually.

The state would retain 20% ownership in the revised proposal so that some funds would continue to be generated for education. In addition, the state would use another $3 billion to $5 billion from the concession lease to replace existing profits.

Blagojevich's stimulus package also would provide a one-time $300 per child tax credit for all state taxpayers who qualify for the federal stimulus package. In a third measure, qualified businesses would receive a 20% tax cut on their corporate income tax bills - at a cost to the state of $300 million. Businesses must maintain their employment levels to qualify for the cut. Both would be paid with proceeds from the state's first securitization of its annual payments under the 1998 master settlement between tobacco companies and states.

The budget also revisits the state's use of pension obligation borrowing. The new proposal to restructure the pension system relies on borrowing $16 billion - a figure that eclipses the state's sale of $10 billion in 2003 of general obligation pension bonds. The funds would go to help bring down the current $43 billion unfunded liability.

State budget officials lauded the last borrowing, saying the play on arbitrage has worked. While the state has paid out $1.9 billion in debt service, the infusion of new cash in 2003 from the bond sale generated $5.2 billion in investment income. The infusion of funds from a bond deal would increase the funding ratio to 75% from 62.6% and allow the state to reach a funded level of 90% 12 years sooner than currently anticipated and save an estimated $55 billion.

It also appears the state would use a small chunk of the bond proceeds to cover the current payment owed to the funds in the next budget, according to legislative sources. Blagojevich came under fire for using about $2 billion of the 2003 deal to cover current payments owed over a two-year period.

Despite worries over tax revenue next year, the budget does provide other spending increases, including $300 million more for education that would come from the proposed sale of a 10th riverboat casino license and increased gaming tax rates. Another $417 million would be raised from a new assessment levied on some employers to expand state health care coverage.

The governor blamed a $750 million deficit in the current budget on the national economic slump and "overly optimistic" revenue projections. The General Assembly's bi-partisan Commission on Government Forecasting and Accountability earlier this month revised its forecast to a deficit of $600 million. The commission early next month will release its estimates for fiscal 2009.

The bulk of state revenues come from individual and corporate incomes taxes and the sales tax. The governor's proposed budget estimates that those three taxes will grow by 1.7% and general fund revenues overall by 2.7%.

To help wipe out the current shortfall, the state would close corporate tax loopholes to raise $200 million and dip into various state fund balances for $500 million. To trim costs in the new fiscal year, the governor proposed 3 % in across the board spending cuts with the exception of public safety, health care and education.

Legislative reaction was mixed and generally skeptical given the animosity between the governor and lawmakers from both parties because of past disputes. Democrats were exceptionally critical of the governor and his actions on a transit bailout bill recently adopted.

"We can always count on Gov. Blagojevich to give a fine speech. However, we have learned from hard-won experience that the devil is always in the details when dealing with his fiscal plans. It will take a few days to analyze and review what the governor has proposed and see how closely his rhetoric matches the substance and reality of what he outlined," House Speaker Michael Madigan, D-Chicago, said.

"It's more of the same, more spending and borrowing into the future and that's always a concern for Senate Republicans," said Patty Schuh, a spokeswoman for the Republican Senate minority. "Some of these ideas have been rejected already."

The state's total budget includes an all-funds total operating budget of $49.7 billion which is $1.9 billion over the fiscal 2008 level. The general fund totals $28.9 billion. The $58 billion includes new and reauthorized capital spending.

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