Illinois Republican Party

Quinn wants to borrow nearly $5 billion - but how?
3/12/2010

By Don Babwin - Associated Press

While laying out his budget plan, Illinois Gov. Pat Quinn sounded less like the leader of a state facing a $13 billion deficit than a guy looking to find a credit card with a better interest rate.

When the state fails to pay public schools, colleges and social service agencies on time, he explained in his budget address this week, it must pay 12 percent annual interest on late payments. Instead, Quinn wants to borrow $4.7 billion at "reasonable market interest rates" to help pay overdue bills.

But big questions remain: Where will the money will come from? What kind of deal can the state get when its bond rating is lower than every state in the country except California? And is the state taking steps that might help its bottom line now but hurt in years to come?

There are several avenues that the state might take:

_ Borrowing from itself.

Among those who might lend Illinois money is the state itself. Budget Director David Vaught said there are various state funds, including the tourism funds, that the government could borrow from for a short time, maybe six months.

Then, the state could get short-term loans, as it did when it borrowed $1.25 billion last August at an interest rate of just over 1 percent.

_ Selling tobacco-settlement shares.

The administration could approach investors with an offer to sell them a chunk of the $300 million Illinois receives every year as part of a multistate settlement with the tobacco industry.

"We could say, we've got this coming in, will you trade me $1 billion now for the right to get $150 million a year," Vaught said.

But the state would be giving up a long-term revenue stream for a quick influx of cash, much like the way the city of Chicago gave up future income when it sold its parking meter operation to a private company.

"You lose revenue in the future to get cash now," Vaught said.

_ Selling bonds.

States often sell bonds to finance things like building roads and other capital-improvement projects, and it could try to do the same to raise money to pay its bills. The bonds would be put on the market, with institutional investors or retail investors buying them. Such a move addresses the immediate need for money but then adds costs because it adds debt service to the cost, meaning the state has to pay more money back.

Illinois' bond rating is "A, Rating Watch Negative," according to Karen Krop, an analyst with Fitch Ratings. That's lower than every state except California, meaning the state likely pays among the highest interest rates on bonds it sells, or money it borrows.

Not only that, but with rating services looking very closely at Illinois, depending on what they conclude about the steps the state is taking to balance its budget, that rating could fall — which would drive interest rates for the state up even more.

Vaught is confident that all sorts of investors will line up to loan the state money, but is concerned that when it does come time to borrow, interest rates will be higher than they are now — and thus it will cost the state more money.

"We're very concerned that if there is gridlock and no action is taken we could suffer as much as a double downgrade (from rating agencies)," Vaught said.

If, for example, rating agencies decide they don't like what they see from Illinois before the state issues $1 billion in 25-year bonds for a massive capital improvement project, "That would mean Illinois would pay an additional $100 million over the life of the debt," he said.

Rating agencies, in fact, have suggested Quinn and lawmakers need to show a plan to balance the budget or risk seeing the state's rating fall.

"We are looking for the state to balance its budget both in terms of revenues and expenses to be enacted for fiscal year 2011, but also by addressing the accumulated deficit," said Krop.

That's where Quinn's call for lawmakers to raise the personal income tax to 4 percent from 3 percent and the corporate rate to 5.8 percent from 4.8 percent comes in. The money would generate $2.8 billion a year to help the state pay schools money already owed them, prevent massive cuts in education spending, Quinn said.

Republican lawmakers aren't having any of it, starting with the call for a tax increase. Sen. Pamela Althoff, for example, said not only would such an increase drive businesses from the state, it could prompt those that remain to cut jobs.

She and others say that reining in spending on state pensions and Medicaid — something they say Quinn and other Democrats have resisted — must be done before they even talk about raising taxes.

SOURCE: AP via Google

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