CHICAGO - Illinois returns to the market next week with $250 million of tax-exempt bonds.

Investors and analysts will have some new factors to digest about the state's ragged fiscal condition after Gov. Pat Quinn proposed making permanent an expiring 2011 income tax hike.

The state will take competitive bids on the tax-exempt 25-year bonds on April 10. Public Resources Advisory Group is advising the state while Chapman and Cutler LLP and The Hardwick Law Firm LLC are bond counsel.

Proceeds will fund the state's ongoing $31 billion capital program. The state plans to return to the market as soon as May with a negotiated sale of $750 million of GOs, which should wrap up its borrowing needs for the year, capital markets John Sinsheimer said recently.

Quinn in his March 26 budget address said he wants to begin work on a new capital program and has suggested closing corporate tax loopholes to provide a possible revenue source.

Ratings agencies have not yet released new reports on Illinois, which will mark their first chance to incorporate Quinn's proposed fiscal 2015 budget into their analysis. The governor staked the state's fiscal future on cementing the 2011 tax increases that begin to expire on Jan. 1.

Illinois has A-minus ratings across the board with Fitch Ratings and Moody's Investors Service assigning a negative outlook and Standard & Poor's assigning a "developing" one after passage of a sweeping pension overhaul in December. The reforms are being challenged by labor groups who believe they violate the state constitution.

In a recent editorial board meeting with the Springfield Journal-Register, Quinn warned that the state's rating is at risk if loses nearly $2 billion in revenue in the next fiscal year and $4 billion in future years if the income tax increases expire. The alternative, he said, is "savage" cuts.

Quinn said the rating agencies in meetings earlier this year were "complimentary" on the pension reforms but he quoted them as saying "what you have to do now is you have to have a permanent structure for your revenues and expenditures and they have to be in balance … you cannot have a temporary situation."

Analysts told the state "very bluntly" it would "suffer the consequences" if that action was not taken by May 31, Quinn said. If the state did act, analysts suggested there was a "very good chance" it would be rewarded, Quinn said.

Investors rewarded the state for passage of the pension reforms by trimming more than 30 basis points off spreads on a 10 year bond in a recent sale compared to a comparable one last June. They have been anticipating that the administration would seek to extend the tax.

Rating agencies have warned the state that a plan to achieve fiscal balance is crucial to its ratings but they have not set a specific deadline. Legal resolution of the pension challenge also remains central to the ratings.

"If pension reform moves forward and the state takes credible action to achieve structural budget balance beginning in fiscal 2015, we believe a higher rating would be warranted." Standard & Poor's wrote in a recent report.

If structural budget gaps are not solved or the pension reforms declared unconstitutional "this could lead us to lower the rating on Illinois," it continued.

Fitch said: "Maintenance of the A-minus rating will require timely action in advance of the expiration of temporary tax increases in fiscal 2015."

Moody's said "failure to address impending revenue loss from partial sunset of 2011 tax increases" could result in a rating cut.

An internet roadshow hosted by Sinsheimer and capital markets manager Jessica Akey, attached to the state's offering statement, outlines the proposed budget for investors.

The governor's recommended general fund budget spends more than $38 billion. That's in comparison to the $34.5 billion spending limit adopted by the General Assembly based on anticipated revenues.

The recommended budget differs from a "not recommended" plan released by Quinn in that it provides $1 billion more for education, $392 public safety, and $1.1 billion more for health and family services. The "not recommended" budget assumes expiration of the income tax increases with $2 billion in cuts.

The recommended budget dips into non general fund accounts for $650 million to pay down bills. The state hopes to reduce a current backlog of $5.4 billion to about $2 billion in 2019 under a five year fiscal plan released in tandem with the budget. The $650 million is repaid over the following two fiscal years.

Quinn's recommended budget restructures property tax relief. It drops a current tax credit that costs state coffers $560 million and switches to a $500 credit with a price tag of $1.27 billion. It also doubles a low income tax credit.

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