State to Increase Borrowing to Cope with Budget Shortfall
November 4, 2009 - 5:18pm
Governor Pat Quinn plans to borrow an additional $900 million to keep the State of Illinois afloat, marking the third time since May of 2009 that the State has used short-term borrowing to offset revenue shortfalls.
The Governor said last week that he will use $205 million of the total $900 million to fund scholarships for low-income students under the Monetary Award Program (MAP). The General Assembly recently approved the additional MAP funding but did not specify a source of revenues. The State will use $250 million of the new borrowing to fund the State’s Medicaid program and the remaining $445 million to pay other bills.
The State sold $1 billion in short-term debt in May of 2009 to cover revenue shortfalls. Another $1.25 billion was issued in August of 2009.
Short-term debt is a financial obligation that must be satisfied within one year or less. Under the State of Illinois Short Term Borrowing Act, the State may issue short-term debt certificates for two reasons: cash flow pressures and failure of revenues. If the state experiences significant timing variations between disbursement of appropriations and receipt of revenues, it may borrow up to 5% of the state’s total appropriations for that fiscal year that must be repaid by the end of the fiscal year.
The State is also allowed to borrow up to 15% of the total appropriations for any year if there is a failure of revenues. This type of short-term borrowing must be paid back within 12 months of issuance. Before incurring this type of debt, the Governor is required to give written notice to the General Assembly and to the Secretary of State, explaining the reasons for the borrowing and the measures proposed to restore the State’s fiscal soundness. Governor Quinn delivered a notice in March of 2009 for total borrowing not to exceed $2.3 billion, which covered the debt issued in May and August of 2009. The Governor will have to deliver another notice 30 days before the new $900 million borrowing takes place.
David Vaught, Director of the Governor’s Office of Management and Budget, announced in October that the State’s personal income tax collections would be down $850 million from prior projections because of rising unemployment. Even before the revenue outlook dimmed, the Governor had said in July that the $26.1 billion in General Funds appropriated by the General Assembly was $1.4 billion less than he needed to run the State.
Governor Quinn is also considering the possibility of borrowing from Special State Funds and will address this option in the spring. Lawmakers would have to approve borrowing from Special Funds, which are accounts for activities funded by earmarked revenue sources that may only be used for special purposes. In addition, the FY2010 state budget passed by the General Assembly and signed by the Governor calls for the issuance of $3.5 billion in five-year notes to help pay for the State’s contribution to its pension system. The pension notes have not yet been issued.
Meanwhile, the State is covering the budget shortfall by not paying its bills. The Comptroller’s Office said that the State had $2.9 billion in unpaid bills at the end of September—a total that did not include roughly $500 million in unpaid Medicaid bills being held by the Department of Healthcare and Family Services and an unspecified amount of unpaid state employee healthcare bills. CIGNA, which processes claims for the State under its traditional fee-for-service group health plan, was holding $335 million in claims as of the week of October 19. The total amount of unpaid bills comes to more than $3.7 billion.
In the last eight years, the state has expanded both the frequency and volume of its issuance of short-term debt. On average Illinois has had $1.8 billion in short-term notes outstanding at any given time since FY2003. Prior to FY2003, and since 1984, Illinois had not issued more than $900 million in short term certificates in any given fiscal year and had never authorized short-term borrowing in more than three consecutive fiscal years. In December of 2008, $1.4 billion was borrowed to relieve cash-flow pressures on the General Funds. The following graph shows trends in the State’s short-term borrowing.
For more information on the State’s short-term borrowing, see the analysis of Governor Quinn’s proposed FY2010 budget published in May of 2009 by the Institute for Illinois’ Fiscal Sustainability at the Civic Federation.
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