CHICAGO — Illinois enters the market next Tuesday with $500 million of general obligation bonds for capital projects and is planning two additional new-money sales before closing the books on the fiscal year in June.
The state also will accept until Friday completed questionnaires it sent out to the broker-dealers in its senior manager underwriting pool asking for their experience in unemployment bond issues, said capital markets director John Sinsheimer.
It will use the responses to put together a financing team for its sale of up to $2.4 billion of bonds to pay off federal loans for its unemployment trust.
Ramirez & Co. Inc. is running the books Tuesday with US Bancorp serving as co-senior and another seven firms rounding out the underwriting team.
Mayer Brown LLP is bond counsel, Charity & Associates PC is co-bond counsel and Public Resources Advisory Group is advising. The bonds mature serially between 2013 and 2037. Proceeds will fund projects in the state’s $31 billion capital program approved in 2009.
“Depending on construction and cash flow we could be back in the market in May,” Sinsheimer said, adding that the May sale of sales-tax backed Build Illinois bonds would be followed by a June GO sale. The sizes are not yet set.
As part of the offering, officials revised the offering documents to provide clearer, up-to-date information on the condition of the state’s general fund over the last four years and projections based on Gov. Pat Quinn’s proposed $33.9 billion fiscal 2013 budget.
“The goal is to provide more information for our investors,” Sinsheimer said.
Illinois’ challenges prompted Moody’s Investors Service to lower its rating on $27 billion of GO debt one notch to A2 with a stable outlook, making it the lowest state it rates. Fitch Ratings rates the state A with a stable outlook and Standard & Poor’s rates Illinois A-plus and negative.
The state has seen a narrowing over the last year of the interest rate penalties demanded by investors due to headline risks over fiscal problems that include mammoth unfunded pension liabilities, an $8 billion backlog in bills, and rising Medicaid expenses. The fiscal crisis eased after lawmakers a year ago approved a income tax hike, but portions of it begin to be phased out in 2015.
The state still captured its lowest true interest cost in decades earlier this year on a competitive GO sale due in part to record low rates in general.
Sinsheimer has been on an investor road-show to update the buyside community on the proposed budget and what he describes as the building political momentum to enact Medicaid and pension reforms, although neither Quinn nor lawmakers have outlined specific plans to address either.
Quinn’s budget proposal would leave a $163 million balance to help pay down the bill backlog while cutting most agency spending, closing state facilities, and eliminating 750 positions. It’s balanced based on revenue and spending estimates but does little to make a dent in the $8 billion voucher backlog.
Lawmakers recently set the revenue slightly lower at $39.7 billion. Individual income taxes are projected to rise by 1.4% while sales taxes are projected to grow by 2.7%; both are considered conservative.
Quinn devoted a good chunk of his budget address to calling on lawmakers to help trim $2.7 billion from Medicaid and to agree on pension reforms.
Illinois closed fiscal 2011 with $82.9 billion of unfunded pension obligations for a funded ratio of just 43.4%. The state owes $5.1 billion to the pension system, up by $955 million in the current fiscal year.
A working group is slated to deliver a legislative plan by April 17.
Michael Brooks, senior portfolio manager at Bernstein Global Wealth Management, said all the talk of addressing Medicaid and pension is a positive but more is needed.
“I would like to see the state say the income tax increase is not going away, that’s it’s going to be permanent,” he said. “I would also like to see anything that would help reduce the accumulated deficit.”
Five-year Illinois paper was recently trading at a 130 basis point spread, better than the 230 spread seen a year ago, but it had been as low at 120.
