* Predictably, the headlines today were all about a proposed pension change that won’t save more than a few dollars (literally) in next fiscal year’s budget, and a few vague proposals for other gubernatorial budget cuts…

* Quinn readies budget ax to chop away at deficit

* Quinn: Job cuts, pension changes possible

* Ill. gov considers 2-tiered pension system

* Budget comes with dose of ‘castor oil’

* Challenges for Gov. Quinn’s first budget

* The Pantagraph also leads with the hype, but its reporters commendably get behind the PR smoke screen to the heart of the matter…

State Sen. Donne Trotter, who is the point man on budget matters for Senate President John Cullerton, said negotiators are discussing boosting the state income tax rate to 5 percent, up from its current 3 percent.

Trotter said officials believe boosting the personal exemption for certain lower income residents could reduce the impact of higher taxes on their pocketbooks. […]

A 67 percent increase in the income tax rate would bring in an estimated $7 billion to help close the gap, meaning additional belt-tightening might have to accompany any increase.

* And those promised cuts? Maybe not so much…

Senate President John Cullerton, D-Chicago, said he’s onboard with changing the pension system but thinks government will be forced to cut only if there’s not enough support for higher taxes. He said it sounds like Quinn will be proposing an income tax increase.

“If there’s no tax increases, we will cut,” Cullerton said. […]

[Sen. Larry Bomke (R-Springfield)] said the only possibilities he sees for trimming the budget are in programs expanded in recent years.

“I honestly don’t know where he would cut,” Bomke said.

* There was also this symbolic diversion which won’t save much money, either, but will make newspaper editorial boards happy as clams…

In [House Republican Leader Tom Cross’] plan, all the current lawmakers would stay in their current plan, arguably the most individually lucrative of all the pension plans in terms of how fast members rack up a pension and the added perks.

But freshmen lawmakers and first-time statewide office holders (who are also in the General Assembly pension plan) taking office in 2011 would instead go into the state employees plan.

However…

Democratic House Speaker Michael Madigan… currently sponsors legislation that would set up a similar system for the General Assembly’s pension plan, said spokesman Steve Brown.

* Meanwhile, in important news, S&P lowered the state’s bond rating because of the massive budget deficit and pension morass…

Citing the state’s “limited action’ in addressing its budgetary problems, Standard & Poor’s Ratings Services lowered its rating on the State of Illinois’s general obligation bonds to “AA-minus” from “AA.”

The debt-rating concern had placed the state’s so-called “GO” bonds’ double-A rating under CreditWatch review for possible downgrade in December, a move that S&P said at the time “reflects our opinion of the state’s growing budgetary shortfall,” as well as concerns about the distraction posed by the legal charges facing the state’s since-ousted governor, Rod Blagojevich.

In marking down the bond rating Tuesday, S&P took the GO bonds off of CreditWatch.

In general, a lower bond rating means the issuer - in this case the state - must pay a higher interest rate to find buyers for its debt offerings.

* And then there’s this…

[Senate GOP Leader Christine Radogno] supports Quinn’s call for a $25 billion capital construction plan but, like Quinn, opposes Cullerton’s idea to pay for it with an increase in the gasoline tax.

Radogno would rather reconsider expanded gambling - a voluntary tax, she said - or leasing the state lottery’s management.

It’s gonna take a while before this thing is soup. In the meantime, look through the smoke to the real story. Tax hikes are coming.