Illinois Sends Divergent Signal to Investors, Voters on Deficit
July 31, 2010, 12:38 AM EDTBy Darrell Preston
July 31 (Bloomberg) -- Illinois Governor Pat Quinn’s administration is sending different messages to municipal- bond investors and voters about its plans to close the state’s $13 billion deficit.
Finance officials are telling overseas debt buyers that Illinois can balance its budget with a 2 percentage- point boost in its income tax, John Sinsheimer, Illinois’s director of capital markets, said in an interview. After Quinn’s Republican opponent criticized that amount, the governor vowed to veto any increase of more than 1 percentage point.
The difference between the two figures equals about $3 billion a year for taxpayers. The contrasting messages suggest that after the November election, promises may have to be put aside to address the shortfall, said Alan Schankel, director of fixed-income research for Janney Montgomery Scott LLC, a money management firm based in Philadelphia.
“They’re going to have to show they’re doing something, or their bonds will fall off a cliff,” Schankel said in an interview. “Once the election is over, they can do what they want and explain it away.”
Asked about the different messages, Ashley Cross, a Quinn spokeswoman, referred to comments the governor made at a July 29 news conference.
“I support a 1 percent surcharge for education, and that’s it,” Quinn said. “I’m going to veto anything that isn’t my plan.”
His budget director, David Vaught, predicted in an interview the day before that state lawmakers will pass a “substantial” income tax-rate increase of up to 2 percentage points in January.
Deficit Penalty
The state’s unresolved deficit and backlog of $4.7 billion in unpaid bills has driven investors to extract a penalty when the state borrows. The yields on 35-year Build America Bonds sold by Illinois on July 21 had increased about 58 percent relative to U.S. Treasury securities since January. The so-called spread to Treasuries rose to 3.294 percentage points from 2.083 in that period, according to data compiled by Bloomberg.
Illinois, which has borrowed about $9 billion since Jan. 1, has the lowest state credit rating along with California, according to Moody’s Investors Service. It ended its 2010 budget year on June 30 “in the worst fiscal position in its history,” Comptroller Daniel Hynes said in an early July report.
Spending Cuts
The state’s deficit is about half of its $26 billion general-fund budget, according to Illinois documents. So far, the governor and lawmakers have focused on cutting spending and borrowing to make annual pension contributions.
The $6 billion a year generated by an increase in personal and corporate tax rates would help close the annual deficit, Sinsheimer said, adding that some investors were impressed by a 2 percentage-point rise when combined with spending cuts.
“The overseas investors we talk to, when we told them we could balance the budget with a 2 percent increase in individual and corporate income taxes, that pretty much raises about $6 billion,” he said in a July 28 interview with Vaught. “They looked at us and said, ‘Only a 2 percent increase?’ They were amazed by that.”
Education Tax
Quinn has called for boosting education funding by increasing the income-tax rate by 1 percentage point to 4 percent for individuals. The state Senate approved a 2 percentage-point increase in 2009, and Quinn testified in the House in support of that legislation, Vaught said in the interview.
State officials have delayed taking action because of the election, Vaught said. Quinn, a Democrat, faces Republican Bill Brady, an Illinois state senator, in the governor’s race.
Kelly Kraft, a spokeswoman for Vaught and Sinsheimer, referred follow-up questions to Cross.
An investor’s cost of insuring five-year Illinois bonds against default hit a record of $370,000 in June to protect $10 million of debt, as efforts to close the deficit languished. The low was $155,000 in January, according to data compiled by Bloomberg. The price had fallen back to $280,000 on July 29.
“When everything is over, it’s not difficult for the Legislators to say the situation is worse than they thought and then increase revenue,” said Robert Rich, director of the Institute of Government and Public Affairs at the University of Illinois in Champaign. “You can’t cut your way out of a $13 billion deficit.”
--Editors: Flynn McRoberts, Pete Young
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To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.
To contact the editor responsible for this story: Pete Young at pyoung13@bloomberg.net
