Monday, January 24, 2011

Bond rating upgrade may be good for Quinn's budget plans

By Jamey Dunn

In the wake of the state income tax increase, one bond-rating agency has upgraded Illinois’ rating, which indicates the state’s ability to pay back its borrowing.

Fitch Ratings gave Illinois an “A” for $3.7 billion in bonds, which will be used to make the state's pension payment for the current fiscal year and are expected to sell in February. It also upgraded Illinois from a “negative” outlook to a “stable” one on $24.5 billion worth of bonds already issued. The group cited the recent income tax increase and pension reforms as improvements to the state’s fiscal stability.

David Vaught, Quinn’s budget director, predicted in January that rating companies would downgrade the state’s bond rating to “junk” if legislators did not raise the income tax rate. Lawmakers voted later that same day to increase the personal income tax rate from 3 percent to 5 percent and the corporate tax from 4.8 percent to 7 percent for four years.

“Following several years during which the state was unwilling to take action to restructure its budget to achieve balance and increased reliance on borrowing to close budget gaps, the tax increase and enacted spending limits close a significant portion of the structural gap in the state's budget through fiscal 2014,” Fitch’s researchers said in a written report.

A more favorable bond rating means lower interest rates on borrowing, which could be a positive for Gov. Pat Quinn. According to three-year projections released by his budgeting office, Quinn is still counting on the approval of $8.75 billion in loans to pay down the state’s backlog of unpaid bills. Legislators voted down the borrowing twice earlier this month. Sen. President John Cullerton has introduced a new borrowing bill, Senate Bill 3, and Republicans have expressed willingness to support some version of the plan. They say, however, that they want less borrowing and some reforms, such as changes to the state’s worker’s compensation system.

Quinn’s plan also includes a $1-a-pack tax increase on cigarettes, which failed to pass in the closing days of last legislative session, and revenues from the temporarily boosted income tax.

Fitch’s report predicts trouble on the horizon under the plan: “The Governor's projected spending plan, which incorporates the additional tax revenues and spending limits, continues to rely on borrowing for operations in fiscal 2012 to accommodate the loss of federal stimulus funds. Further, the tax increases are temporary and will begin to phase out in 2015. Even if the state has achieved budget balance by that point, it will once again be faced with a significant budget balancing decision to make severe expense reductions that it has been unwilling to make up to this point, identify new revenues, or make permanent the tax increases. In addition, the state's ability to reduce its accounts payable backlog in a meaningful way relies on debt issuance that has yet to be authorized.”

When asked if the governor's office has a backup plan if the legislature does not approve the borrowing or cigarette tax, Kelly Kraft, spokesperson for Quinn's Office of Management and Budget said in a written statement, "These projections, along with continued economic growth, represent the Governor's plan to address the state's fiscal challenges."

The group’s research found that Illinois’s current borrowing debt is 6.3 percent of 2009 personal income, which the authors describe as “moderate but above average.” Under Quinn’s plan, it would be nearly 9 percent of 2009 personal income, which is described as a “high level.” However, the report said, “The ability of the state to bring its payment obligations more current in a timely manner will be limited without the borrowing [in Quinn’s proposal].”

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