Illinois feels no love from bond investors

The proposed state financial fix, with its income tax increases and steep borrowing to pay bills and pension obligations, does not go far enough to assuage many bond investors' concerns about the risks of lending to fiscally teetering Illinois, according to a range of debt market experts.

While investors laud Democrats for taking the unpopular step of suggesting increases in personal and corporate income tax rates, they say lawmakers also need to cut state spending if they want to improve the state's deteriorating credit rating and lower the punishing borrowing costs associated with its fiscal mess.

"This makes me think they have not gotten religion," said bond portfolio manager and author Marilyn Cohen, president of Envision Capital Management Inc., in Los Angeles. "They need to amp it up."

The tentative plan, which continues to be negotiated, calls for an income tax hike to support as much as $12.2 billion in new borrowing, including $8.5 billion to pay overdue bills and $3.7 billion to cover the state's contribution to employee pension funds this fiscal year.

While the plan suggests a moratorium on new programs and would limit new spending to less than 1 percent, it does not make sweeping cost cuts.

Read the rest here.