World Crisis Online

Illinois wants to borrow another $8.75bn to help address its large backlog of unpaid bills, the state’s governor said on Wednesday.

One month after the state raised taxes by up to 67 per cent, Pat Quinn, the Democratic governor, presented a budget that aims to cut $1bn from spending but depends on borrowing to help the state address $8.7bn in unpaid bills to schools, universities, social service providers and contractors.

Illinois’ financial crisis is among the worst in the US. The state faces a $15bn budget deficit and unfunded pension liabilities of at least $80bn.

Mr Quinn needs legislative approval for the new borrowing. That may prove difficult, since the minority Republicans oppose the plan and instead want spending cuts, while more conservative Democrats may also vote against the proposal. The legislature last month blocked a plan for more borrowing.

Separately from the governor’s proposal, Illinois plans to sell almost $4bn of bonds next week to pay its annual contribution into the state’s public pension funds. The state has to borrow the money to pay its bills at a time when credit is tightening for states and local governments.

Investors are pulling back from the $3,000bn municipal bond market where states and local governments raise money, primarily for infrastructure, on fears that years of budget deficits will lead to rising defaults in the wake of the recession.

All states apart from Vermont have to balance budgets annually and they have been forced to deal with collective deficits of $388bn since 2008, according to the National Conference of State Legislatures.

Over the past few months, investors have withdrawn more than $25bn from mutual funds that buy “munis”, according to Lipper, a fund tracker. Most investors in this market are individuals who benefit from tax breaks on traditional munis.

“That is an awful lot of debt for the muni market,” said Matt Fabian, managing director at Municipal Market Advisors. He added that “$8.7bn is typically a week’s worth of issuance. Illinois, in particular, is one issuer that investors have been shying away from”.

Illinois trades at the highest yield of the 50 states. Its 10-year tax-free bonds have a risk premium, or spread, of 2.05 percentage points versus 10-year triple A rated muni bonds.

In making the new borrowing proposal, the governor hit back at his opponents. “If you don’t agree with our debt restructuring plan, tell us which programmes you would eliminate to pay $8.7bn in overdue bills today. Put it out there for all to see. Saying No is not enough unless you are willing to offer real alternatives.”

Mr Quinn said the borrowing was necessary for the state’s financial situation and the economic health of Illinois, which is still suffering from the loss of manufacturing jobs during the recession.