CHICAGO — With its credit on Moody’s Investors Service watch list for a downgrade, Illinois plans to launch a roughly $7 billion borrowing spree in the coming months to raise funds for shovel-ready capital projects, pay down its bills, restructure debt, and to cover its pension payments now that a new fiscal 2010 budget is in place.
State lawmakers and Gov. Pat Quinn emerged from meetings on Wednesday with an agreement on a new all-funds $54 billion fiscal 2010 operating budget for the fiscal year that began July 1, including a $26 million general fund. Lawmakers approved the plan and Quinn signed it late Wednesday.
The plan is heavy is on one-time maneuvers including the issuance of $3.4 billion of debt to cover most of the state’s $4 billion payment owed to its pension systems. Repayment of about $3 billion in bills would be pushed off to the next fiscal year.
The state will restructure about $2.2 billion of debt, pushing off principal payments owed in fiscal 2010 and 2011 a few years to save about $500 million and dip into the balances of non-general fund accounts for $356 million. Quinn must cut $1 billion and lawmakers gave him the ability to cut another $1 billion at his discretion.
The governor and lawmakers acknowledged the plan’s flaws and need to revisit the proposed income tax increase early next year. “We’re doing this because we have to do it. But it’s wrong to do it … the General Assembly will reconvene in January to address our need for additional revenue,” said Senate President John Cullerton, D-Chicago.
The budget now faces the scrutiny of Moody’s analysts who placed the state’s A1 general obligation credit on the watch list for a downgrade early yesterday. Analysts’ review over the next month will focus on the impact of the budget on the state’s ability to restore fiscal balance and on other challenges, including a $73 billion unfunded pension liability and $24 billion retiree health care unfunded liability.
“When we decided to put the credit on the watch list for a possible downgrade the likely reliance on non-recurring revenues loomed large and that appears to be what came out of the budget process,” said analyst Ted Hampton. “The state put off decisions that would help restore structural balance.”
Moody’s action affects $24 billion of state-backed debt, including $20 billion of GOs, $2.1 billion of A1 rated sales-tax backed Build Illinois debt, and $2.26 billion of debt issued by the Metropolitan Pier and Exposition Authority.
With the state facing a $12 billion budget gap, Quinn pushed hard for a 50% income tax increase and pension reforms. Those measures, although unpopular with voters and union members, were viewed by rating agency analysts as having positive long-term effects on the state’s fiscal operations. They also made his one-time measures, like the debt restructuring and a pension payment holiday, more palatable.
Before adjourning in May, the Senate adopted its own version of an income tax increase but the House rejected it and Quinn ultimately vetoed the barebones budget sent to him by lawmakers amid warnings that it would devastate the state’s social services network.
Quinn is a Democrat and the General Assembly’s chambers are controlled by Democrats. Illinois had suspended pending borrowing plans without an operating budget in place and was under pressure to act by Wednesday when state payroll checks were delayed.
With the spending plan in place, the state is looking at selling competitively about $1 billion of short-term certificates for cash-flow purposes in the next month, said state debt manager Phil Culpepper. Illinois’ constitutional officers must sign off on the plan. Illinois in April issued $1 billion of notes that will be repaid in the current fiscal year. Under so-called lapse period spending provisions, the state can pay bills incurred in fiscal 2009 with fiscal 2010 revenues into August.
Officials are also planning in August to restructure about $1.5 billion to $1.7 billion of GO debt pushing off $500 million in near-term principal payment to 2012 through 2017. A restructuring of Build Illinois bonds to complete the overall $2.2 billion plan will be done later in the year.
The state in late August or September would then competitively sell about $300 million to $400 million of new money GOs to raise funds for shovel-ready projects approved in a mini-capital budget earlier this year. The program is part of the larger $31 billion capital works program signed into law by Quinn on Monday. A Build Illinois sale that would also be done competitively and is not yet sized would sell in late summer to fund previously approved projects.
In September or October, the state would issue through a negotiated sale the GO pension obligation notes that are limited to a five-year maturity. “We have authority to sell the debt in one tranche or to break it up into several issues and have not yet made a decision,” Culpepper said.
Culpepper is reviewing proposals from underwriters seeking a spot on the state’s new lists of qualified senior and co-managers to work on negotiated transactions and from financial advisers and bond counsel. The lists are expected to be announced next week.
Culpepper said the timing of Moody’s review caught the state off guard and finance officials hoped to address rating agency analysts concerns to fend off a downgrade in the coming weeks.
“The state would like bondholders to know that repayment of its GO and sales tax bonds are air tight and that the state has ample liquidity of $6 billion in special fund balances,” he said.
The state has already suffered several recent downgrades due to its fiscal struggles. Moody’s in April knocked the credit down one notch to A1. Fitch Ratings rates the state AA-minus but has it on negative watch. Standard & Poor’s downgraded the credit in March to AA-minus.
Moody’s described the state’s revenue shortfalls, narrow operating liquidity and bill payment delays as credit challenges along with its unfunded pension-related liabilities and delayed public of audited financial reports. Moody’s described the state’s diverse economy and its ability to raise revenues and reduce expenses as credit strengths.
Moody’s also noted the state’s political unwillingess to address its structural problems. That’s remained unchanged although Quinn initially enjoyed a more friendly relationship with lawmakers than his predecessor Rod Blagojevich. Lawmakers removed Blagojevich from office earlier this year after Blagojevich’s arrest on corruption charges. Quinn was then lieutenant governor.