CHICAGO — As Gov. Pat Quinn signed legislation Thursday increasing Illinois’ income tax, his debt manager met with rating agencies while the state plans to issue $3.7 billion of pension bonds next month and may resurrect a failed $8.75 billion borrowing to pay bills.
The General Assembly approved the pension issue shortly after passing legislation to increase the income tax and impose temporary caps earlier in the week.
The state has selected Goldman Sachs & Co., Loop Capital Markets LLC, and Morgan Stanley to serve as co-book-running senior managers. Mesirow Financial Inc. and William Blair & Co. are co-seniors. Peralta Garcia Solutions is serving as adviser. The state hopes to sell the bonds in mid-February, Kraft said.
“Gov. Quinn is committed to making the pension payments and borrowing the least costly option for taxpayers,” she said.
The legislation calls for the sale of eight-year general obligation bonds with no principal payments in the first two years. The state would retire $100 million in the third year, $300 million in the fourth year, $600 million in the fifth year, and $900 million in the remaining years.
Illinois sold $3.5 billion of five-year GO notes to cover much of its fiscal 2010 pension payment. The state has unfunded pension liabilities of $62.4 billion. The fiscal 2011 budget did not include funding for pension payments, forcing some of the funds to sell off assets to meet obligations.
Lawmakers rejected a key piece of the fiscal bailout that authorized issuing $8.75 billion of debt to pay off state bills, but Quinn will resurrect the proposal in the next few weeks, state budget spokeswoman Kelly Kraft said Thursday. A three-fifths majority is needed for new debt authorization.
On Thursday, the Democratic governor signed SB 2505. Without any Republican support, the Illinois House and Senate narrowly passed the legislation late Tuesday and early Wednesday to raise the individual income tax rate to 5% from 3% and the corporate rate to 7% from 4.8%. The increases will raise about $6.8 billion annually over the next four years before being rolled back to respective rates of 3.75%, and 5.25%. They would further drop to rates of 3.25% and 4.8% in 2025.
With the state facing a $15 billion deficit going into fiscal 2012 this July, Quinn has defended the steep increases as needed in order to deal with the state’s fiscal emergency and appease investors and rating agencies. The pension bonds received some Republican support, but members in both chambers blasted the tax hikes and called for additional spending cuts.
All three major rating agencies said they were reviewing details of the legislation and several planned to release comments in the coming weeks. The state has seen its ratings tumble over the last two years as lawmakers resorted to one-shot revenues to deal with growing budget deficits as revenue floundered amid the national recession.
Kraft said state debt manager John Sinsheimer was meeting with rating agencies in New York City on Thursday to provide details of the legislation and the state’s debt plans.
Moody’s Investors Service rates Illinois’ $25 billion of general obligation bonds A1 and Fitch Ratings rates them A, both with negative outlooks. Standard & Poor’s rates the state A-plus, but has it on negative CreditWatch. The agencies said they are reviewing the tax legislation and how it fits into the larger scheme of the state’s budget and liquidity pictures.
The legislation also includes a first-time cap on new spending growth. After setting a base of $36.8 billion for fiscal 2012 — which is about 10% higher than current levels — it then limits growth to 2% annually over the next three fiscal years. The caps include escalating state pension payments.
The state auditor general is charged with reviewing whether the General Assembly remains in compliance, and if the office determines the state has exceeded the cap, lawmakers or the governor must act to reduce spending to the authorized level or the income tax reverts back to the previous rates.
With the state in such dire need of new revenue, Kraft said the governor would cut spending to meet the requirement. Investors have praised the tax hikes as a positive step but urged the state to also cut costs and address its pension woes to restore stability.