New Illinois governor to order spending freeze

By Karen Pierog
Republican Bruce Rauner smiles after winning the midterm elections in Chicago, Illinois, November 4, 2014. REUTERS/Jim Young

By Karen Pierog

CHICAGO (Reuters) - Illinois’ new governor, Bruce Rauner, took his first shot on Monday at addressing the state's crippling financial crisis, saying he will order all state agencies to freeze non-essential spending.

In his inaugural address following his taking the oath of office, the Republican first-time officeholder said Illinois' history of bad fiscal management was hurting the state's ability to compete.

"Our government has spent more than we could afford; borrowed money and called it revenue," Rauner said. "Rather than responsibly budgeting the money we had, we implemented programs we couldn’t afford."

The former private equity investor also said the fifth- largest state is facing moral and ethical crises and that he will sign an order on Tuesday to improve ethics and accountability in the executive branch of state government.

The Land of Lincoln is buckling under a chronic structural budget deficit and the lowest credit ratings and worst-funded pension system among the 50 states. The fiscal crisis is the worst the state has seen for decades and could be the nation's biggest.

In addition to the spending freeze, Rauner said state agencies will review and report on every contract signed since Nov. 1. On Friday, his transition team reported "an effective plan will include spending cuts, efficiencies, comprehensive tax reform, and many changes that, over time, will require difficult choices and shared sacrifice."

To make progress, Rauner will need to find a way to work with a legislature dominated by longtime Democrat power broker Mike Madigan, speaker of the Illinois House.David Merriman, an Illinois budget expert at the University of Illinois, said Rauner needs to focus on what is politically achievable. "You have a Democratic legislature and a Republican governor, so they're going to have to figure out some way to work together," he said.

In his speech, Rauner pledged "to work on a bipartisan basis to drive results and get things done." Senate President John Cullerton, a Democrat, issued a statement saying he looks forward "to working together with (Rauner) to build a better Illinois."

Richard Ciccarone, president and CEO of Merritt Research Services, said Rauner's speech hit the bullseye.

"If Illinois can't contain and grow its resources, it won't have the resources to solve its problems," he said.

Pension payments are projected to jump to nearly $7.6 billion in fiscal 2016 from $6.8 billion this fiscal year. Outgoing Democrat Governor Pat Quinn's budget office recently estimated Illinois' unpaid bills will climb to $9.8 billion at the end of fiscal 2016, from $4 billion this year.

"In the modern era... the state has never been in this poor of a financial condition," said Laurence Msall, president of the Civic Federation, a Chicago-based government finance watchdog group.

Robert Amodeo, a portfolio manager at asset manager Western Asset, put Illinois in the same class with the most troubled municipal bond issuers in the nation. "We will continue to monitor developments in Puerto Rico, New Jersey and especially Illinois, all of which face challenging fiscal conditions," Amodeo said.

To sell its debt, Illinois has had to offer hefty yields. Illinois bonds due in 10 years yield about 140 basis points more than stellar AAA-rated debt, according to Municipal Market Data. California, which is bouncing back from its fiscal morass, has a so-called credit spread of only 24 basis points.

Illinois' credit ratings, at A-minus and A3, are the lowest among the 50 states and rating agencies have warned of further downgrades. An immediate concern is the Jan. 1 partial expiration of 2011 temporary tax hikes that moved the personal income tax rate down to 3.75 percent from 5 percent, and dropped the corporate rate to 5.25 percent from 7 percent.

Quinn's budget office projected that income tax revenue will drop by $5.16 billion to $14.64 billion in fiscal 2016, which begins July 1. The state's projected general fund deficit is expected to balloon to nearly $5.8 billion, from just $180 million this fiscal year.

Rauner said the tax hike hurt Illinois' economy and put more stress on the state's social safety net. "As a result, today Illinois is not as competitive as we need to be and cannot be as compassionate as we want to be," he said.

(Reporting by Karen Pierog; Editing by David Greising and Eric Walsh; Editing by Dan Grebler)