The Bond Buyer
Illinois Budget Short on Solutions
Monday, May 10, 2010
CHICAGO - With no long-term resolution in sight over the state's budget crisis, Illinois lawmakers on Friday were careening towards a scheduled weekend end to their session after giving public universities new borrowing authority and approving a debt restructuring for the agency that manages Chicago's convention center.
With rating agencies and investors watching, the Democratic-controlled Senate adopted a $52 billion budget Friday and the House was expected to adopt a similar plan, but sharp disagreements remained within both chambers over how to pay for the budget and deal with a $13 billion deficit.
Lawmakers were moving towards using several one-time revenue sources to help chip away at the deficit going into the fiscal year that begins July 1. Gov. Pat Quinn had pressed for a 1% income tax surcharge that would have raised $3 billion annually, but dropped it due to a lack of House support.
Lawmakers remained at odds over whether to borrow to cover the state's $4 billion pension payment as Quinn wants, to withhold payments until the end of January after the results of the November election are known and lawmakers and the governor are sworn into office, or to take pension holiday.
A three-fifths majority is needed for any bonding measures to win approval. Democrats hold a supermajority in the Senate but only a simple majority in the House.
Though lawmakers previously approved reforms that reduce benefits for future employees and will lower state contributions over the long term, the state closed fiscal 2009 with a $62.4 billion unfunded liability in its four retirement funds, for a 51% funded ratio that is considered the worst in the nation.
Lawmakers on Friday were also pondering a bill that would allow the state to sell up to $1.75 billion of bonds backed by its share of tobacco settlement payments. Under the plan, the state would sell between $1.4 billion and $1.5 billion of 17-year bonds, netting $1.2 billion for the general fund.
Under proposals being considered Friday, the final budget could include a cigarette tax increase that could raise $320 million, and use of $1 billion from non-general fund surpluses.
It likely will push off payment of billions of dollars worth of bills owed in fiscal 2010 by as many as four months into 2011. The state is expected to close out fiscal 2010 with a backlog of $5.5 billion of bills. The budget also likely will include at least $2 billion in cuts.
While the budget pushes off difficult decisions until after the November election, it allows lawmakers to return to the districts with the message that at least they were able to stave off $1.3 billion in education cuts.
"We are in a tough, tough budget situation," Quinn said Friday. "We have to take the revenue we have and apply it in a way that is best for the people. I think saving education is important."
A heavy reliance on one-time measures could trigger further downgrades. Fitch Ratings rates the state's $23.4 billion of debt A-plus - up from A-minus due to its recalibration - and has the rating on negative watch.
Standard & Poor's rates the state A-plus, but has the rating on negative watch. Moody's Investors Service rates the state Aa3 with a negative outlook, up from A2 due to its recalibration.
The House on Thursday and the Senate on Friday approved legislation that overhauls the governance and operating structure of the Metropolitan Pier and Exposition Authority and allows it to restructure its debt.
The restructuring is aimed at providing near-term fiscal relief as tourism-related revenues are falling short of debt-service needs. The authority manages Chicago's McCormick Place Convention Center and Navy Pier.
MPEA used $18.8 million in Illinois sales tax revenue for its fiscal 2009 debt payments and estimates it will need $34 million this year. The state's sales tax revenue can be used as a backup pledge - subject to appropriation - on the bonds.
The fiscal pressures spurred Fitch to drop the rating on $2 billion of expansion bonds one notch to A-plus over the summer. Moody's also dropped bonds supported by the state tax subsidy to A3 after it downgraded the state. Standard & Poor's rates the expansion bonds AAA.
Under the legislation, the MPEA can sell up to an additional $450 million of debt that will also carry the state's backup pledge to finance a hotel expansion or other capital improvements at existing facilities.
The current limit is $2.1 billion. The agency can refinance its existing $2 billion of convention center expansion bonds and $140 million of older debt, pushing off the current 2042 final maturity as far as 2060.
The legislation could result in an 18-year extension of the authority's taxing powers that includes a 6% tax on auto rentals in Cook County, a 2.5% tax on hotel rooms in Chicago, a 1% tax on downtown restaurants, and a departure tax on airport taxi rides. The taxes are expected to respectively generate $25 million, $38 million, $31 million and $8 million in fiscal 2010.
The legislation doubles the airport taxi fee to $4 to generate an estimated $8 million more annually with the revenues earmarked for the convention center in Rosemont and the city's convention and tourism bureau.
It also requires that MPEA conduct a competitive selection process for investment bankers.
The legislation extends a $31.7 million annual state subsidy to MPEA to 2032 from its current expiration of 2014 at a total cost to the state of $440 million.
It also provides a general fund subsidy of $10 million in fiscal 2011 and $5 million in each of the next three years to help the authority service its debt, freeing up some of the authority's tax revenues to cover operating shortfalls.
"Eventually, expanded hotel or other MPEA revenues will replace this use of surplus," the analysis reads.
The fiscal and debt restructuring is expected to have a net savings on the state general fund of $335 million between fiscal 2011 and 2032. MPEA had estimated that it would need $800 million in additional state guaranteed subsidies absent the restructuring.
"McCormick Place has to be competitive and this is a responsible plan that reduces the burden on the state," said Patty Schuh, a spokeswoman for the Senate minority Republican caucus. The overhaul received bi-partisan support.
The other reforms aimed at reducing convention costs include moving the agency towards private management.
It replaces the current chief executive officer with an interim trustee - Jim Reilly, chairman of the Regional Transportation Authority of Illinois board and adviser to a legislative committee on overhauling MPEA. Reilly also previously served as CEO of MPEA.
The current CEO, Juan Ochoa, resigned last week. The legislation also allows for the sale of naming rights and work rule changes. The reforms were spurred by the loss of two major trade shows and warnings that others might leave too.
Lawmakers also gave final approval to legislation that would allow Illinois' eight public universities to issue short-term debt to manage through the state's chronic payment delays.
The delays contributed to Moody's decision earlier this year to downgrade five of the universities. Moody's assigns negative outlooks to seven of the eight.
Under the legislation, the board of trustees of each of the universities could issue bonds or use some other form of debt, like a bank loan, in anticipation of its payments from the state.
The bill limits the issuance to 75% of the total amount of payroll and other expense vouchers submitted to the comptroller's office but unpaid. The schools must repay the debt within 12 months and the new borrowing authorization would end Aug. 31.