Illinois inaction boosts borrowing costs, budget director says

Thursday, July 29, 2010

The price of political inaction is adding up, Illinois's budget director said, and it's measured in the state's cost of borrowing.

Illinois has been penalized in the $2.8 trillion municipal bond market because of the deficit, David Vaught said in an interview. The state's $1.3 billion short-term borrowing, which officially closed yesterday, was more costly than a larger one a year ago. The longest maturity due in June 2011 priced at a yield of 2.125 percent. Last year's $2.25 billion of short-term borrowings priced at less than 2 percent.

The Legislature in Illinois, which is in its worst financial position ever, lost the political will to address the state's $13 billion deficit because of the November election, said Governor Pat Quinn's budget chief. They will find it after voters cast their ballots, Vaught said.
"We're going to pass a tax increase in January," he said. "We expect it is going to be substantial."

Lawmakers probably will increase the individual and corporate tax rates by 2 percentage points, generating $6 billion of new revenue, Vaught said.

The governor has called for boosting the rate by 1 percentage point to pay for education funding, and the state Senate approved a 2 percentage point increase, John Sinsheimer, Quinn's director of capital markets, said in an interview.

"We don't know what the House is going to do," Sinsheimer said.

At one point before lawmakers passed reforms to cut the cost of pension contributions, a rating company threatened the state with a double downgrade if it didn't take steps to address its deficit, Vaught said.

'Real Feedback'

"That's real feedback," he said. "If we don't deal with it, it will get worse."

The state has been under pressure from companies that rate municipal bonds to show it has the willingness to address its deficit for the fiscal year that began July 1.
Fitch Ratings cut its rating on $25.7 billion of debt from A+ to A, its sixth-highest investment grade, in June. Moody's Investors Service cut the rating one level to A1 on June 4.

The cost of insuring five-year Illinois bonds against default more than doubled to a record of $370,000 in June to protect $10 million of debt, from a low of $155,000 in January, according to data compiled by Bloomberg. The price had fallen back to $281,000 yesterday.

The state ended fiscal 2010 on June 30 "in the worst fiscal position in its history," Comptroller Daniel Hynes said in a report. The state's backlog of unpaid bills rose to $4.7 billion from $2.8 billion a year earlier, Hynes said. The state's general fund balance fell to negative $4.7 billion, the lowest level in the state's history.