December 28, 2010 / 10:04 PM / 9 years ago

Illinois eyes more borrowing to ease cash woes

CHICAGO (Reuters) - Illinois’ borrowing spree would continue into 2011 under a plan Governor Pat Quinn is floating to sell more debt to deal with a huge unpaid bill backlog and pension payments.

Kelly Kraft, a Quinn spokeswoman, said on Tuesday that the Democratic governor is working with the legislature on a variety of options for the ailing state budget, including an income tax increase and “responsible borrowing.”

But as the General Assembly returns to work next week for the final days of its lame duck session, nothing has been finalized, Kraft added.

Legislation to increase Illinois’ 3 percent income tax rate and authorize a $3.7 billion pension fund bond issue has yet to win approval from both chambers of the Democrat-controlled legislature. The state’s lack of cash could lead to a $15 billion deficit that would include $8 billion of unpaid bills heading into fiscal 2012, which begins July 1, the state comptroller has warned.

Illinois Senate President John Cullerton supports Quinn’s plan to borrow for pensions and to ease the state’s bill backlog, said spokeswoman Rikeesha Phelon.

Republican votes would be needed in the Senate to muster the three-fifths requirement to approve the pension bonds, while the House needs to act on an income tax increase, which the Senate has already passed, Phelon added.

Steve Brown, spokesman for House Speaker Mike Madigan, said while he was aware of talk of another phase of borrowing, he would have no comment until there is an actual plan. He added that an income tax increase would need bipartisan support in the House.

A spokeswoman for Senate Republicans was not immediately available to comment.

The state is betting on a good reception in the $2.8 trillion municipal bond market to borrow as much as $15 billion next year because debt service payments are a top priority.

Illinois was the biggest single issuer of municipal debt, at $8.67 billion, in the first three quarters of 2010, according to Thomson Reuters data.

But the state’s cascading bond ratings and well-publicized cash woes are raising some concerns.

Bill Gross, who invested $5.5 million of his own money in five municipal bond funds run by his Pacific Investment Management Co earlier this month, told CNBC on Tuesday he would avoid Illinois debt.

Illinois’ credit default swap hit 335 basis points on Tuesday, far exceeding the 298 basis points for California, according to Markit Intraday. California shares with Illinois Moody’s Investors Service’s lowest state general obligation rating of A1.

Illinois’ CDS, or insurance against a bond default, started the year at 168 basis points, zooming to 365 basis points on July 2, according to Markit Intraday.

Meanwhile, tax-exempt municipal bond prices slipped for a second straight session on Tuesday.

The price decline boosted yields on top-rated, 10-year bonds 1 basis point to 3.16 percent, while 30-year yields also inched up a basis point to 4.68 percent, according to Municipal Market Data.

Reporting by Karen Pierog; Editing by Kenneth Barry

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