Regional News

Illinois Set to Offer $1.2B of Notes

CHICAGO -Illinois will take competitive bids tomorrow on $1.2 billion of notes.

Proceeds will be used primarily to cover payments owed to more than 200 hospitals under the final year of a hospital assessment program that has leveraged $1.8 billion in additional federal Medicaid matching dollars.

The general obligation certificates carry the state's full faith and credit. There will be two maturities - $900 million due May 23 and $300 million due June 17. Bids are due by 11 a.m. Central Daylight Time.

Foley & Lardner LLP is bond counsel on the transaction.

The notes are expected to carry top short-term ratings from all three rating agencies, although new reports have not yet been issued.

The state's $20 billion of long-term GOs are rated Aa3 by Moody's Investors Service and AA by Fitch Ratings and Standard & Poor's, with Fitch assigning a negative outlook. That figure includes $10 billion of pension bonds sold in 2003.

The three-year hospital assessment tax program generates an additional $600 million annually in Medicaid reimbursements from the Federal Centers for Medicare and Medicaid, with hospitals receiving about $470 million and the state using the remainder for other health care expenses.

Once the hospitals receive payments from the proceeds of the short-term borrowing, Illinois receives back from the federal government the additional reimbursement payments. The hospitals then make their tax payments, based on volume levels, for a total $734 million. The state uses the federal funds and the tax payments to repay the notes.

The state opted for two separate maturity dates, unlike past short-term borrowings that were repaid in one lump sum, to better match the flow of funds used to repay the notes and provide some added liquidity to pay other bills as other revenue flow into state coffers. An added benefit is the potential opening the shorter maturity provides for smaller capitalized firms.

"We think given today's market, the structure gives smaller firms a chance to bid, keeping interest as low as possible," said state debt manager Phil Culpepper.

Illinois used similar short-term financings last year to cover payments owed in fiscal 2006 and fiscal 2007. Gov. Rod Blagojevich recently signed a supplemental budget appropriation allowing the state to collect the final year's assessment.

The fiscal 2008 budget had contained an appropriation, but a delay in the state's distribution of the second-year funds forced officials to tap the fiscal 2008 appropriation late last year. Once completed, the plan will have leveraged an additional $1.8 billion in federal funds. A predecessor one-year program leveraged another $430 million. 

"This spending plan will bring immediate relief to many hospitals in need throughout the state, especially 'safety-net' hospitals serving poorer communities, teaching hospitals, and rural hospitals," state Sen. Jeff Schoenberg, D-Evanston, and a sponsor of the program, said in a statement.

The Senate has held three public hearings on a revised program to replace the expiring one. Only the 62 hospitals in Cook County would pay the assessment based on patient volume. The tax would raise about $730 million, with the expectation that it would leverage nearly $600 million in federal matching funds.

Much of the overall pot would then go to hospitals across the state, although Cook County hospitals - especially those with the largest Medicaid volumes - would receive the largest share. The Federal Centers for Medicare and Medicaid Services must approve it as well. The current assessment tax on not-for-profit hospitals is imposed statewide and some hospitals are opposed to the revisions.

The state has all the necessary approvals in place to sell the notes, including authorization from the comptroller, the treasurer, and the attorney general's office. A timing dispute between the governor's office and Attorney General Lisa Madigan delayed the sale last year, prompting the need for a supplemental authorization.

Once the note sale is completed, the state then will issue $125 million of fixed-rate GOs in a competitive sale set for next Wednesday. It's the last new-money borrowing expected in the current fiscal year, Culpepper said.

Borrowing levels in the next fiscal year are uncertain as lawmakers weigh passage of a $25 billion capital budget. Blagojevich's proposal relies on $3.8 billion of new borrowing and $7 billion of proceeds from a partial privatization of the state lottery. Local and federal matching funds and pay-as-you-go financing would cover the rest. Lawmakers have promoted plans that rely on an expansion of gaming.

Though support is strong across party lines for a capital plan after four years in which no new capital bonding has won approval, passage of a multiyear plan is uncertain in the current legislative session given the divisive atmosphere between lawmakers and the governor stemming from past disputes.

The General Assembly also must pass an operating budget for the fiscal year that begins July 1 and approve a plan to wipe out a $750 million deficit in the current budget due to a slump in sales taxes and corporate income taxes. Blagojevich proposed a $58 billion budget for the new year and wants to eliminate the current shortfall by closing corporate tax loopholes to raise $200 million and by dipping into various state fund balances for another $500 million. The budget also includes plans to sell $16 billion of GO pension bonds and $1.2 billion of tobacco bonds.

The note and long-term GO sale - with a level debt service schedule and 25-year maturity - represent Illinois' first debt offerings amid the market's current credit crunch. "We think the [note sale] will be well-received. The state's credit is strong and it's a short duration," Culpepper said.

Illinois has escaped the problems many other issuers face in dealing with rising rates on their auction-rate securities and insured variable-rate bonds, since the bulk of its debt portfolio was issued using a fixed rate. The state's only floating-rate bonds include $600 million of variable-rate demand bonds sold in 2003, but they did not carry insurance and have not seen any noticeable spike in rates when remarketed, Culpepper said.



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