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State's debt-laden budget prompts Moody's to put it on watch list
Bloomberg News
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Published: 7/16/2009 11:23 AM

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Illinois's long-term credit rating was put on watch by Moody's Investors Services after lawmakers adopted a budget that includes $3.5 billion in short-term notes to meet pension expenses.

"We are concerned about how the state will move from here to return to balanced financial operations," said Ted Hampton, the Moody's analyst who wrote the report on Illinois. "The state has essentially kicked the can down the road in terms of making decisions."

Illinois lawmakers adopted yesterday a $26 billion budget for the fiscal year that began July 1.

The budget doesn't include a 1.5 percentage-point increase in the 3 percent income tax rate Governor Pat Quinn sought. Lawmakers said they may consider increasing taxes later this year or early next year.

The state plans to borrow $3.5 billion to cover employee pension payments, said Steve Brown, a spokesman for Illinois House Democrats.

Officials, who sought to avoid social service cuts, plan to issue the four- to five-year bonds in September, Brown said.

The budget also postpones $3.2 billion in payments to state vendors until after the fiscal year ends June 30, 2010.

The Illinois employees pension plan was 46 percent funded as of June 20, 2008, although the state issued $10-billion in long-term pension obligation bonds in 2004, Hampton said.

Moody's, which rates Illinois A1, its fifth-highest investment grade, said it plans to focus on the new budget plan and future prospects in its ratings analysis.

"The review will focus on consideration of the state's prospects for restoring structurally balanced financial operations while addressing sizable funding requirements for pensions and retiree health benefits, as well as the state's liquidity position and growing debt burden," the rating update says.