More Bad News for State Budget Updated X2

February 7th, 2008 at 01:07pm Aaron Chambers

First it was slowing state revenue, thanks to the slowing economy. Now it’s slowing interest income on the state’s investments, thanks to the slowing economy.

Over the next two years, that lost interest income could add up to real money, and that could only aggravate the state’s deteriorating fiscal position. So says a letter released Thursday from state Treasurer Alexi Giannoulias.

In the last fiscal year, which ended last June 30, Giannoulias said the state earned nearly $426 million on its investments. But during the current fiscal year, which ends June 30, he predicted the interest income would total less than $400 million.

The big hit is expected to occur in the next fiscal year, which begins July 1. Giannoulias predicted interest income could drop by roughly half:

The state will feel the full impact of the lower rates and asset size in fiscal year 2009 when we project that interest income will only total between $184 million and $243 million. Previous economic downturns produced declining yields and declining investment balances for up to two years.

Even if the yields return to fiscal year 2007 levels faster than anticipated, total interest income will probably not rise to previous levels because the amount of funds invested will still be smaller. We anticipate that our interest income will not recover to fiscal year 2007 levels for quite some time.

The treasurer concludes:

This anticipated reduction in interest income poses significant challenges for the state’s fiscal outlook going forward, and I urge the Governor and members of the General Assembly to provide the fiscal responsibility and leadership necessary to offset this decline. At the same time, the State Treasurer’s Office will work to further enhance the state portfolio and continue to protect and secure state investments from unnecessary risk.

The interest income is allocated under a statutory formula. In the last fiscal year, the state’s general revenue fund — its central checking account — got 47 percent of the dollars. The rest went to special-purpose funds.

UPDATE 1

The State Journal-Register has more.

UPDATE 2

I should have noted this earlier. State officials are mulling a short-term borrowing plan to help play down a backlog of bills.

Entry Filed under: Illinois Budget, alexi giannoulias, illinois economy, Illinois finance