 When the state fails to pay public schools, colleges and social
service agencies on time, he explained in his budget address last
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 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 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.
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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
and 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 that
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.
And that may add up to bad news for the state, which has to show
it is serious about balancing its budget.
"The political climate is very difficult there, and there doesn't
seem to be a lot of appetite for measures that would bring this
budget into balance," said Krop.
[Associated Press;
By DON BABWIN]
Copyright 2010 The Associated Press. All rights reserved. This
material may not be published, broadcast, rewritten or
redistributed.
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