CHICAGO -- Gov. Jim Edgar of Illinois has vowed to veto legislation passed by the state's House of Representatives last Wednesday that would extend the state's income tax surcharge for another two years, with its revenues continuing to be split between local governments and schools.

Gov. Edgar said the House bill would jeopardize the state's credit rating because $100 million of surcharge money would not be available to bolster the state's general funds balance at the end of fiscal 1992, according to his spokesman, Mike Lawrence.

Under the governor's proposed budget for fiscal 1992, which begins July 1, the state would return to local governments only half of the surcharge revenues they are currently getting and would use $100 million of the revenues to bring the yearend balance in fiscal 1992 to $200 million. Another $50 million of the revenues would be used for education funding, Mr. Lawrence said.

A shrinking yearend balance in fiscal 1991 led Standard & Poor's Corp. to place almost $7 billion of Illinois debt on CreditWatch with negative implications. State finance officials estimate the fiscal 1991 yearend balance at $100 million, which is $295 million less than the balance at the end of fiscal 1990.

Officials from both Standard & Poor's, which rates the state's general obligation debt AA, and Moody's Investors Service, which rates it Aaa, have said they are looking for the state to make hard decisions in its fiscal 1992 budget to bring expenditures and revenues in line and improve the yearend balance.

The House bill would give a two-year extension to the temporary surcharge approved by the General Assembly in 1989. The bill would also continue to split between local governments and schools the $700 million a year raised from 0.5% increase in the state's 2.5% personal income tax and 0.8% increase in the 4% corporate income tax.

The Senate last month approved a bill that would make the surcharge permanent -- a move supported by the governor. However, under the Senate's plan, the share of revenues that have been going to local governments would be deferred for 18 months and placed in a fund to pay state Medicaid bills.

After 18 months, local governments would only receive about half of the surcharge revenues they had been getting. Schools would continue to collect their full share.

In addition, the Senate bill contains a property tax reform plan that would restrict the annual property tax revenue growth of non-home rule governments in the state to 5% or the rate of inflation, whichever is less.

Steve Brown, a spokesman for House Speaker Michael Madigan, D-Chicago, contended the House surcharge plan, which also includes a property tax relief component, was revenue neutral and would not hurt the state's credit ratings.

On the other hand, he said the Senate's plan would have the potential to hurt the credit ratings of local governments due to the cutoff of surcharge revenues for 18 months. For example, Chicago is counting on the $45 million of surcharge revenues it expects to receive during the last six months of this year to balance its current budget.

In addition, capping tax levies for non-home rule communities and schools could put more pressure on their finances, Mr. Brown added.

Spokesmen for Senate leaders said the House plan would meet with opposition in the Senate. "I don't thing [the governor] will have to veto it because it won't get passed," said Mark Gordon, speaking for Senate Minority Leader Pate Philip, R-Elmhurst.

With only a week left for the General Assembly to wrap up its spring session, Mr. Lawrences said the governor's surcharge plan may end up being the compromise solution.

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