The Bond Buyer

Illinois Issues Less But Ranks Sixth in the Bond Buyer 100

Thursday, March 29, 2012

CHICAGO — Illinois borrowed $4 billion last year to fund capital projects and cover its fiscal 2011 pension payment, putting it among the ranks of top issuers, but its issuance levels actually marked a sharp drop from 2010, when the state flooded the market with $8.7 billion of paper in nine deals.

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The state sold $3.7 billion of taxable, eight-year general obligation bonds in February 2011 to cover pension payments owed in fiscal 2011, and followed up with a competitive $300 million issue of sales-tax-backed bonds in October to fund capital projects, making it the sixth largest debt issuer.

Illinois’ borrowing levels last year tapered off after a spree of bonding in 2010, with deals aimed at easing pressures on the general fund and to fund projects in a $31 billion capital program approved in 2009.

“We will be issuing smaller issues more frequently to better size our issues to our cash needs” after issuing new money for capital in larger deals since 2009, said John Sinsheimer, the state’s director of capital markets.

Illinois has paid a premium to borrow in recent years due to a series of credit rating downgrades and headlines over its fiscal challenges. A temporary income tax approved in early 2011 helped stabilize the state’s credit and lower its borrowing spreads. While the state saw spreads of more than 200 basis points over Treasuries in 2010, they have narrowed, coming in at 55 to 168 basis points on its last GO sale in early March.

“The institutional market continues to really understand the work by the governor and the General Assembly in addressing the state’s fiscal challenges,” Sinsheimer said. “We have a lot of work yet to do. If working with the governor, we can produce reforms to the pension funds, Medicaid and the outstanding vouchers, then I think we are OK and the spreads will come in” further.

While the tax increase initially eased fiscal strains, the state’s failure to take further action on the challenges cited by Sinsheimer prompted Moody’s Investors Service earlier this year to drop Illinois’ $27 billion of GOs to A2 from A1 with a stable outlook, making the state the lowest rated by Moody’s. Fitch Ratings affirmed the state’s A credit and stable outlook while Standard & Poor’s affirmed its A-plus rating and negative outlook.

The state’s unfunded pension liabilities totaled $82.9 billion at the close of fiscal 2011 for a funded ratio of just 43.4%, Medicaid costs are skyrocketing, and officials anticipate closing out the current fiscal year on June 30 owing between $8 billion and $9 billion in bills.

Gov. Pat Quinn highlighted the need to reform pensions and cut $2.7 billion from Medicaid when he unveiled his proposed $33.9 billion general fund budget for fiscal 2013 last month. Lawmakers have pledged to tackle both issues, although details on how to accomplish both tasks have not yet been released.

“Today a rendezvous with reality has arrived. …We must achieve fundamental and lasting budget reform and we must do it now,” the governor told lawmakers.

Quinn is a Democrat and his party controls the General Assembly. If a budget is not approved by the end of May, the plan requires a three-fifths majority that would require Republican support.

S&P; recently praised Illinois’ action on the tax hike and previous pension reforms, but analysts warned they could act this year on their negative outlook.

“We could lower the rating by more than one notch if the state makes no progress on structural budget solutions and does not address the significant pension liabilities and associated cost pressure,” they said.

The state economy continues on a slow but steady mend. “Key factors supporting the A-plus GO ratings include what we consider Illinois’ deep and diverse economy, which is anchored by the Chicago metropolitan statistical area, and above-average income levels,” said S&P; credit analyst Robin Prunty.

Individual income tax revenues are projected to rise by 1.4% in the next fiscal year, with corporate income taxes projected to grow by 8.3% and sales taxes by 2.7%. The three account for 88% of Illinois’ revenue. The state’s population was estimated at 12.8 million in 2010, a 3.3% increase over 2000.

IHS Global Insight Inc.’s forecast assumes employment growth of 1.3% and personal income tax growth of 3.4%, higher than the respective national rates of 1.4% and 3.8%. State unemployment is expected to remain at 9.6%, exceeding the national rate of 8.7%.