CHICAGO – Hungry for new money to fuel its capital budget, Illinois will take competitive bids next week on $300 million of taxable sales-tax backed bonds, with another $1.6 billion of new-money and refunding debt in the works.
About half of the bonds will sell with a sturdy and highly rated sales-tax backing. The other half will come with Illinois’ general obligation backing, testing market appetite for paper that offers steep yield penalties but faces headline risk as legislative action to address the state’s pension crisis is needed in the coming weeks to avert further credit deterioration.
On that front, a House committee Wednesday advanced Speaker Michael Madigan’s sweeping reform package submitted Tuesday but it’s at odds with Senate President John Cullerton’s proposal. Both are Democrats.
The state will take competitive bids on the $300 million issue – which carries top credit marks from Standard & Poor’s – on May 9th. Public Financial Management Inc. is advising the state. Mayer Brown LLP and Hardwick Law Firm LLC are bond counsel. The bonds mature serially through 2037.
Proceeds will finance construction projects under the state’s ongoing $31 billion capital program. The issue is taxable because some projects don’t qualify for tax-exempt status due to private use or other technical issues.
The $1.6 billion of subsequent issuance includes a tentatively sized $600 million refunding of sales-tax backed bonds expected to sell before the close of the fiscal year June 30. The state also intends to return to the market in June or July with $1 billion in new-money GO bonds.
The state will sell the refunding and GO issue in negotiated sales and the teams have not yet been finalized, said Illinois’ capital markets director John Sinsheimer. The state draws from a pool of previously qualified underwriters in a set rotation but has some flexibility on the rotation for refundings.
The deals follow the state’s first deal of the year in April. It competitively sold $800 million of GOs in a transaction pushed back from January, when Illinois faced soft market interest from potential bidders following negative credit action and a tough market.
The state launched an investor blitz and saw strong interest with bids in line with the yield penalties – about 140 basis points over triple-A rated, 10-year municipal paper -- reflected in secondary market trades.
The state will hold a roadshow and some investor calls on the upcoming sale, but not the same extra push as on the last deal.
“We had not been in the market for some time so we had a lot of information to update investors on,” Sinsheimer said. “These Build Illinois bonds are well understood by the market and are highly rated.”
Rating updates are expected later this week. The sales-tax bonds carry current ratings of AAA from Standard & Poor’s based on the coverage ratios. Fitch Ratings assigns a AA-plus rating and stable outlook to the credit. Moody’s Investors Service rates the bonds A2 with a negative outlook, the same as the state’s GO credit. Moody’s has not been asked in recent years to rate the Build Illinois bonds.
The bonds are backed by the state’s share of sales taxes and they benefit from strong coverage of 23.6 times in 2011 and 25 times in 2012. Maximum debt service cannot exceed 5% of the state’s sales taxes from the most recent fiscal year for senior lien issuance. The state imposes a 6.25% sales tax of which it keeps 5% and 1.25% goes to local governments.
The state collected $7.7 billion in fiscal 2012 and through March has collected $5.8 billion, according to the offering statement. It has exhausted $4.7 billion of $5.7 billion in new-money authorization and currently has $2.7 billion of bonds outstanding under the Build Illinois program, of which $2.3 billion are senior lien. The state sold $375 million in a similar taxable deal in April 2012.
The final sizing on the sales-tax refunding is not set.
“We have not had a Build Illinois refunding since 2010 so there are a lot of bonds out there that are ripe for refunding,” Sinsheimer said. The state expects to exceed its minimum threshold of 3% present value savings on the transaction.
The timing of the next GO sale may depend on the General Assembly finalizing a version of Gov. Pat Quinn’s $35.6 billion fiscal 2014 budget and action on pension reforms in the waning weeks of its spring session.
Standard & Poor’s rates the state’s $27 billion of GOs A-minus and assigns a negative outlook, making it the lowest-rated state. Fitch assigns an A rating to the state’s $27 billion of GO debt and has the credit on negative watch. Moody’s rates Illinois GOs A2 with a negative outlook.
The state is grappling with a massive unpaid bill backlog of $7.5 billion, the scheduled partial expiration of an income tax increase in 2015, and daunting unfunded pension obligations of $95 billion. Pension payments will rise by $900 million to $6 billion in the next budget, consuming 19% of the general fund.
After pushing individual reforms through the House this year, the Democratic House speaker introduced a sweeping package Tuesday and a committee advanced it to the floor Wednesday. It draws from provisions in previously floated House and Senate packages while expanding them to cover four of the five state unions.
Madigan’s plan calls for capping the current 3% cost-of-living increase, raising the retirement age to 67, hiking employee contributions, and capping pensionable salary. Madigan did not include a plan to shift the cost of suburban and downstate teachers’ pension payments from the state to local districts, which is opposed by Republicans.
Supporters said the plan could shave $150 billion off future state payments. The plan would move to fully funding the system over 30 years. The bill also sends an additional $1 billion in state funding to the system once existing pension notes are retired in the coming years.
The plan also strengthens the pension payment pledge, requiring that the pension system boards take action to compel the state to make the actuarially required contribution in the event it does not. The bill however makes clear that the payment is subordinate to state debt service obligations.
Madigan amended Cullerton’s Senate Bill 1 to bring it before the House. Cullerton wants to pass a reform package that includes a backup plan should courts rule that the changes violate constitutional rules protecting pension benefits. In his bill, retirees would then be asked to voluntarily adopt the reforms in order to preserve their subsidized retiree health insurance.
“Now is the time to take this major step to restore fiscal stability to Illinois,” Quinn said in a statement Wednesday after House committee passage of Madigan’s bill.
