Illinois sells bonds for 3.9%; critics contend it should have been a lot lower

State's bad credit rating blamed

Thursday, January 12, 2012

Illinois borrowed $525 million Wednesday at what Gov. Pat Quinn's administration said was the state's lowest rate in decades.

The problem, critics contend, is that the state could have gotten even lower interest rates if its finances were in order. And skeptics noted Illinois taxpayers still are paying more to take out loans than many other states.

Despite a recent downgrade of the state's credit rating, the state received an interest rate of 3.9 percent for $525 million worth of tax-exempt bonds it sold toWells Fargo on the open market. Quinn's budget office touts that as the lowest interest rate Illinois has received on bonds to pay for construction projects since 1976. The state sold an additional $275 million in taxable bonds at an interest rate of 5.29 percent toJ.P. Morgan Securities LLC.

It was welcome news for Quinn's office after some predicted interest rates would spike after Moody'sdowngraded Illinois' credit rating from A1 to A2, worst in the nation according to that rating service.

"Positive feedback like we have seen today from investors demonstrates the strong confidence investors have in Illinois," Quinn budget chief David Vaught said in a statement. "These bond bids make it clear that investors know we are taking steps to correct the decades of fiscal mismanagement in our state, and they understand we continue to take major steps to reform pensions and control skyrocketing Medicaid costs in an effort to return Illinois to sound financial footing."

But Brian Battle, director of Chicago-based Performance Trust Capital Partners, said the state primarily benefited from the timing of the bond sale, as interest rates are currently very low. Because the state's credit rating is also low, Illinois is paying higher interest rates than other states, leaving taxpayers on the hook for millions of dollars more.

"The good news is somebody showed up and the bonds sold, the bad news is we're still paying a higher rate than anybody else that's comparable," Battle said. "We are paying a penalty rate."

In issuing the downgrade, Moody's cited Illinois' failure to "implement lasting solutions to its severe pension underfunding or to its chronic bill payment delays." Quinn said Tuesday that he will push for pension reform this year along with other cost-cutting measures as a way to shore up the state's budget, which is still billions of dollars in the red despite last year's major income-tax increase.

Patty Schuh, spokeswoman for Senate Republican Leader Christine Radogno ofLemont, said "it's too bad that the state of Illinois is not in a better financial state to really capitalize on these historically low rates."

The state owes $27.4 billion in outstanding bonds, said budget spokeswoman Kelly Kraft. That doesn't include more than $80 billion in money owed the public employee pensions systems nor the billions in unpaid bills.