Lawrence Msall

CHICAGO - Fresh from selling $1 billion of general obligation bonds in February, Illinois returns to the market next week with a $402 million taxable revenue-backed issue.

The senior lien bonds, being issued under the state's Build Illinois bond program, will price through competitive auction on March 11.

Columbia Capital Management LLC is advising the state and Chapman and Cutler LLP and Charity & Associates PC are bond counsel. Proceeds will fund the state's ongoing $31 billion capital program.

The upcoming sale marks a more palatable choice for investors with worries over the state's finances, because of the sales-tax backing with strong coverage ratios of more than 20 times.

Outstanding bonds in the program are rated AAA by Standard & Poor's and AA-plus by Fitch Ratings. Although neither has released updated reports, they compare favorably to the state's general obligation bonds that are rated at the low single-A level.

The sale comes amid uncertainty about how the state will tackle the looming expiration of a temporary income tax hike.

It's getting suggestions.

Illinois should delay expiration of the higher rates for a year, then phase in a partial rollback over the next three years while implementing spending controls and expanding the tax base, a prominent Chicago-based government research organization offered in a report Monday.

The Civic Federation of Chicago says its five-year plan would eliminate Illinois' $5.4 billion backlog of bills and put it on course toward structural balance.

"This comprehensive approach, combined with the implementation of major pension reform legislation, would finally allow the state to move beyond what has become a perpetual fiscal crisis," the federation's president, Laurence Msall, said in the report from the organization's Institute for Illinois' Fiscal Sustainability.

"Revenue enhancements alone are not enough to provide long-term stability for the state's finances while over-reliance on expenditure reductions could cripple essential services," he added.

The state faces a $3 billion deficit in its budget for fiscal 2015, which begins July 1, due to rising spending mixed with the $1.6 billion drop in revenue forecast because income tax rate rollback begins midway through the fiscal year.

Gov. Pat Quinn won't unveil his 2015 budget until later this month and has not yet shown his hand as about how the state should deal with the revenue loss.

The state's precarious fiscal position was bolstered by passage of a pension overhaul in December but the changes are being challenged by public sector employees and labor. Market participants have called the income tax rollback the other remaining hurdle to stabilizing state finances.

The Civic Federation report warns that the state can't afford the tax rollback yet.

"In analyzing the state's finances, the Civic Federation has concluded that the steep rollback in income tax rates would dramatically destabilize Illinois' already weak financial condition," the report says.

If the rollback is not halted, the personal income tax rate would fall from 5% to 3.75 % on Jan. 1 and the corporate rate to 5.25% from 7 %. The 2011 tax increase raised the personal rate to 5% from 3% and the corporate rate to 7% from 4.8% corporate.

Under the Civic Federation plan, rates would eventually be lowered to 4 % for individuals and 5.6 % for corporations.

The plan recommends the state adopt spending controls to pay down the $5.4 billion bill backlog in five years and establish a reserve equal to at least 5% of the state's more than $30 billion general fund. To ease the impact of the income tax rollback, the state should extend its income tax base to cover federally taxable retirement income.

Quinn's administration said it welcomed the report, but did not tip its hand on the tax rollback.

"While these major and fundamental reforms will help secure Illinois' financial future, the issue of expiring revenue this year is a real one that will require more tough decisions. All the options should be evaluated," Quinn's deputy budget director Abdon Pallasch said, referring to the passage of Medicaid and pension reforms.

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