CHICAGO — Illinois Gov. Pat Quinn’s proposed $52 billion fiscal 2011 budget relies too heavily on borrowing, leaves too many bills unpaid, and will only aggravate the state’s fiscal crisis, a Chicago-based government watchdog organization said yesterday in announcing its opposition to the spending plan.
The Civic Federation slammed Quinn’s plan to privately place $3.7 billion of pension notes, securitize the state’s tobacco settlement payments to raise $1 billion, and borrow $1 billion from non-general fund accounts.
The governor’s original budget plan relied on $4.7 billion in some form of “strategic” borrowing to help chip away at a combined $13 billion deficit that includes an operating deficit in fiscal 2011 of $7 billion and a $5.9 billion shortfall from fiscal 2010.
Finance officials last week fleshed out details of the proposal for legislative leaders and boosted total borrowing by $1 billion to $5.7 billion in announcing their proposal for the pension notes, tobacco issue, and inter-fund borrowing.
“Unfortunately, the governor’s recommended budget falls short of the goal that must be a top priority for all state leaders — to stabilize the state’s finances,” said the federation’s president, Laurence Msall. “Borrowing $5 to $6 billion for operating expenses neither balances the budget nor helps ensure next year’s budget crisis will be any better.”
The federation warned such action could drive up the cost of state bond issuance since it could trigger further downgrades. Fitch Ratings rates the state’s $23.4 billion of debt A-plus — up from A-minus due to its recalibration — and has the rating on negative watch. Standard & Poor’s rates the state A-plus, but has the rating on negative watch. Moody’s Investors Service rates the state Aa3 with a negative outlook, up from A2 due to its recalibration.
The governor’s Office of Management and Budget defended the proposed budget, saying the federation’s analysis did not recognize “how budget cuts, borrowing, and the surcharge for education are all necessary this legislative session to move Illinois toward budget and fiscal stability.”
The federation warned that the state can’t afford the borrowing needed to support the $30.5 billion capital budget approved last year, including $1.6 billion of new bonding for projects authorized in fiscal 2011. The state expects to sell a total of $19 billion of bonds between fiscal 2010 and fiscal 2016 to support the overall capital program. The report called it “irresponsible” to borrow $19 billion over the next five years without a strategic plan for those investments and while the state cannot afford to pay its bills.
The report also warns that the revenues approved last year “appear insufficient to support” debt service. The new revenues come from increased vehicle and license fees, expanding the sales tax to include candy and some other items, a marketing lease of the lottery, increased alcohol taxes, and legalized video poker.
The alcohol tax is the subject of a lawsuit, more than 50 communities have opted out of video poker, and the lottery lease has been delayed. “Any shortfall in the revenues passed to pay for the debt service will lead to additional stress on the state’s operating budget,” the report warned.
State budget officials countered that the spending is needed to create jobs.
The proposed budget leaves $6.2 billion in bills unpaid, though Quinn’s revised proposal could cut that in half — using money raised from the proposed increase in borrowing. The governor has also proposed extending by four months to six months the period into the next fiscal year during which the state can pay the previous year’s bills. The federation is opposed to those actions.
To help solve the state’s budget crisis, Quinn wants lawmakers, before their scheduled adjournment next month, to approve a temporary 1% income tax surcharge to raise $3 billion annually. While the federation has previously said it could support a tax increase, it opposes Quinn’s proposal because the new revenue would primarily go to offset $1.3 billion in proposed education cuts.
In addition to the extra $1 billion of borrowing, the governor’s revised budget plan relies on additional but unspecified cuts. Quinn has already proposed $2.2 billion of cuts and would raise more revenue through consumer and business tax changes.
The federation’s analysis praised various management proposals that would save money. It also commended the governor and lawmakers for adopting pension reforms that reduce benefits for future employees. However, the watchdog group believes Illinois should hold off on shaving $267 million off pension payments owed in fiscal 2011. The state’s unfunded pension liabilities totaled $62.4 billion or a funded ratio of just 50.6% — the worst in the nation — at the close fiscal 2009.
The report also praises the proposal in fiscal 2011 that retirees pay a share of their health insurance premiums. Illinois would save $254 million under the proposal. The state is carrying $24 billion in unfunded other post employment benefit liabilities as well.
Also yesterday, Bank of America Merrill Lynch’s weekly municipal commentary noted the size of the state’s unfunded pension liabilities as a concern and said the state’s liquidity problems, highlighted in the state comptroller’s quarterly report issued earlier this month, may have put the market on edge.
The Merrill report noted that after issuing little long-term GO debt in fiscal 2008 and 2009, the state has flooded the market in fiscal 2010 with $7.7 billion of debt following the sale last week of $700 million of Build America Bonds.
In looking at trading activity on taxable 5.1% Illinois GO bonds due in June 2033 against the B of A Merrill Lynch Build America Bonds index since the beginning of the year, Illinois has underperformed. As spreads between Treasuries and BABs have narrowed significantly, Illinois has not.