CHICAGO - Illinois will take bids Thursday on $1 billion of general obligation certificates - the first of two issues totaling $2.25 billion planned for the current fiscal year that won't be repaid until the next in an effort to relieve cash-flow pressures as the state grapples with a $12 billion deficit.
This week's note deal will include two tranches, each for $500 million, with one maturing April 26, 2010, and the other May 20, 2010. The winning bidder on the later tranche must cover issuance costs, according to the offering documents on the transaction. Katten Muchin Rosenman LLP is bond counsel.
"Proceeds of the certificates will be used to supplement revenues during fiscal 2009 to relieve general cash-flow pressures," the offering statement reads. The borrowing represents a deficit financing as it will go to help balance the current year's budget with repayment pushed off until the next, a practice that underscores the state's stressed financials.
Illinois traditionally has used short-term borrowing to smooth cash-flow in the same fiscal year, but due to the current year deficit was able to tap a provision in state rules that allow for debt to be incurred up to 15% of appropriations in the case of "emergencies or failures of revenue." It must be repaid within one year of issuance.
Officials have defended the move as part of a two-year plan to solve the budget crisis, but it hinges on lawmakers adopting Gov. Pat Quinn's $52.9 billion fiscal 2010 budget, including an income tax increase that lawmakers have been resistant to embrace.
Fitch Ratings and Standard & Poor's were asked to review the transaction and issue a short-term rating but had not yet released their reports by press time. Moody's Investors Service was not asked for a short-term rating. All three were told of the plan to issue the notes when the state sold $150 million of long-term GOs last month.
The state's $1.4 billion certificate issue in December drew little market interest when it sold after Moody's stripped the state of its top short-term ratings. The downgrade cut into the deal's appeal with money market funds as any further credit deterioration would force their hand into shedding the debt.
Moody's last month lowered the state long-term GO credit on $19 billion of debt to A1. Fitch rates the state AA-minus but has the credit on negative watch. Standard & Poor's downgraded the state in March to AA-minus. It had the state's short-term rating on the December transaction on negative watch but removed it last month.
At the time, analyst Robin Prunty said Standard & Poor's remains concerned over Illinois' strained liquidity but was reassured by its ability to repay the December notes as they mature in the current fiscal year, which ends June 30 with $6.1 billion in surpluses held in non-general fund accounts if needed.
The new deal should benefit from a more stable political environment. At the time of the December sale, the news was still fresh on the federal government's early-morning arrest of then-Gov. Rod Blagojevich a week earlier on corruption charges stemming from pay-to-play allegations.
All three rating agencies have noted that Quinn enjoys a more cooperative relationship with lawmakers than his predecessor did. Blagojevich was removed by the General Assembly through impeachment earlier this year, making it more likely that Illinois can address its budget problems. Broker-dealers also may seek to curry the state's favor on a planned negotiated borrowing that's expected to go ahead should a $26 billion capital budget pass.
The $2.25 billion in cash-flow borrowing represents a significant piece of Quinn's plan to address the $4.3 billion shortfall in the current budget that's part of an overall $12 billion, two-year deficit, and to pay down a backlog of overdue bills.
"Reflecting the fact that the primary cause of the fiscal 2009 budget deficit is revenue shortfalls and based upon the state's ability to borrow across fiscal years under such revenue shortfalls, the governor proposed a $2.25 billion fiscal 2009 general obligation borrowing in the budget introduced March 18," according to the OS.
Quinn has also proposed transferring $200 million from surpluses in various non-general fund accounts, withholding $100 million in spending, and suspending $183 million in pension contributions. The state expects to receive $2.4 billion in federal stimulus payments including $1.4 billion for Medicaid and $1 billion for education to help with the deficit.
The governor's budget for fiscal 2010 anticipates a surplus of $2.4 billion that would be more than sufficient to cover the new certificates as they come due, but that projection hinges on the General Assembly's adoption of Quinn's measures.
An increase in the individual income tax would raise $2.9 billion, and a hike in the corporate tax would raise $350 million, with another $365 million coming from a cigarette tax hike. Another $287 million would be raised through the elimination of tax credits and shelters and the transfer of $582 million from other funds. The state also expects $1.7 billion in federal stimulus payments for fiscal 2010.
The budget also relies on a series of one-time revenue measures that include restructuring about $2.2 billion in debt to save $530 million. The state would cut $2.5 billion off the $4 billion scheduled pension payment and require workers to take four unpaid furlough days.
Permanent savings would come from spending cuts and requiring employees to increase their pension contributions, and from employees and retirees increasing their health care payments while new employees would see their pension benefits cut. However, the governor has since backed off the proposal to require higher pension payments from employees.
The budget also includes authorization to sell up to $12 billion of pension GOs if market conditions are favorable. Illinois faces a $73 billion unfunded pension liability that has skyrocketed over the last year due to investment losses.
The Civic Federation of Chicago in conjunction with its new Institute for Illinois' Fiscal Sustainability on Monday issued a stinging assessment of the proposed budget package. The group's 90-page report called on lawmakers to reject the plan because it raises taxes without addressing the state's structural problems.
"The governor's proposed budget does not focus sufficiently on overcoming the fiscal crisis, diverting money into policy objectives instead. The budget proposes only $1.3 billion in spending cuts, a level the Civic Federation finds inadequate. Moreover, the proposed income tax increase ... will not be reserved to reduce the state's staggering existing liabilities," the report says.
The federation is opposed to any cut in the scheduled pension payment. "The state's unfunded pension obligations are major contributors to Illinois' growing budget deficit," said president Laurence Msall. "Shorting the state's pension contribution while raising taxes to address the state's structural budget deficit crisis is illogical and counterproductive." The group did praise Quinn for proposing "bold changes" that would trim benefits for future employees.
It also opposes the $26 billion capital budget because it is not tied to a comprehensive planning process.
"From a fiscal perspective, the federation is very concerned that the governor's proposal fails to provide an adequate revenue stream to pay the debt service on the capital programs after the third year and extends all the state's current capital debt, which would have expired within the next 15 years, to 2045," the report reads.
The capital budget relies on $8.6 billion of borrowing that would be repaid with increased driver license fees and car title fees, and cash from the transportation fund and general fund.
The governor's office declined to comment on the Civic Federation report, but issued a statement saying: "Gov. Pat Quinn's proposed budget is the most comprehensive, fair and realistic answer to the state's massive financial problems. It provides a solid blue print for balancing the budget while also providing tax relief for nearly five million people."