CHICAGO — Stepping into the state budget fray, the Illinois Finance Authority expects to soon finalize a $115 million state moral-obligation backed financing to speed up overdue payments for essential goods and services.
The funds won't make much of a dent in a $7 billion state bill backlog, but the aim is to target services being threatened by the lack of state payments due to the five-month-old political stalemate over a fiscal 2016 budget
Some providers owed state funds are "facing dire financial consequences" and there's a threat that they "will no longer be able to provide essential goods and services to the state of Illinois," said IFA Executive Director Christopher Meister.
The move is unprecedented for the state's largest conduit agency on several fronts, from its use of an "emergency" procurement to pick an underwriter/placement agent for the proposed transaction to its commitment of balance sheet funds to support the effort.
"Extraordinary times call for extraordinary actions," Meister said Thursday after the board approved several resolutions paving the way for the transaction.
The board approved the selection of Citi as senior manager or placement agent on the financing, although the agency may add minority or women-owned firms to the final transaction, Meister said.
The board also approved resolutions allowing the agency to execute financing documents and any agreements needed with state agencies and to tap up to $12 million of the authority's $17 million in available funds with a portion going to cover upfront issuance costs and fund debt service reserves if needed.
A portion of the $12 million allocation will also go to allow for more immediate action to help local governments and vendors.
The IFA will use a portion to cover no-interest loans to local governments struggling to keep their 9-1-1 emergency services intact without state budget funding. Meister said the board felt it important to "employ" some of the $12 million for urgently needed help. Meister said he spoke with one central Illinois sheriff who warned he was facing layoffs.
Another portion of the $12 million will speed up payments for good and services deemed most pressing.
"Some vendors may not be able to wait for the completion of the bond deal," Meister said. Those payments can be rolled into the financing.
The final form of the transaction and its tax status is still in the works, but it's expected to carry a state moral obligation pledge. The authority is eyeing either a direct placement or a public offering and financing could be sold all at once or in pieces. The final maturity has also not been determined with the request for proposals contemplating terms that ranged from two years to 10.
The authority would use proceeds to purchase overdue vendor claims. The IFA would repay the debt based on the assumption that the state will eventually adopt a fiscal 2016 budget with line items allocating funds for those vendor claims. The state pays interest on overdue claims so the IFA would also receive those payments to cover interest on the debt.
"The authority has determined that issuance of the bonds will be in the best interest of the residents of the State and will serve to increase job opportunities and to retain existing jobs in the state," the resolution said.
Meister said the IFA would work with state agencies to decide what vendor invoices would be paid, in order to comply with rules that paved the way for the IFA to use an expedited procurement process allowed for emergency purchases to select a financing team.
The size of the transaction is limited to $115 million as the IFA is capped by its statutes to $150 million in moral obligation debt and it has $35 million outstanding. Meister said he expects to bring a final transaction to the board by its regular December meeting or, if ready before, would seek approval at a special board meeting.
The IFA must close on the transaction within 90 days under emergency procurement rules. The IFA launched the competitive underwriting selection process last month. It received 19 underwriting responses from which a list of six finalists was culled. Those firms were narrowed down after interviews to four. Acacia Financial Group and Sycamore Advisors are advising the IFA on the transaction.
"Of the four finalists, one firm stood out: for the ability to execute within a 30- to 45-day timeline, pricing and fees consistent or better than other finalists, preparation and understanding of IFA needs and the MO mechanism, cash flow estimation, and truncated (though appropriately thorough) disclosure requirements to speed the transaction execution," IFA documents said of the selection of Citi.
The financing is the result of a request from Gov. Bruce Rauner's office for state agencies to examine how they can assist in managing through the budget impasse. Administration officials attended the start of the underwriting interviews to convey their support.
Meister said the authority reviewed its statutes to see what tools were within its power. IFA statutes permit the financing of public-purpose projects that promote the health, safety, morals, and general welfare of the people of the state through bonding and loans, and by providing guarantees. Meister said the financing is crafted to meet those requirements.
Rauner's office would need to sign off on the use of the moral obligation pledge. In the event a budget is not approved before a debt service payment is due, the IFA would need to request the needed amount to cover the payment or to restore reserves that may have been tapped. A failure on the state's part would likely lead to further credit deterioration.
A resolution of the dispute between the rookie GOP governor and the General Assembly's Democratic majority could stave off the need for the financing. While some compromises have been achieved there are few signs that either side is backing down for its position ahead of a meeting slated for Wednesday between Rauner and the Democratic and Republican leaders. Some have warned not to expect any budget agreement until the new year.
Rauner is pressing Democrats to support his policy and governance initiatives as part of the budget process including passage of union contracting curbs in exchange for support for a tax hike to balance the budget. Democrats oppose Rauner's proposals and want the budget tackled separately. Rauner initially proposed a $32 billion budget but Democrats are pushed through a $36 billion spending plan that Rauner vetoed all but the education piece. The partial expiration this past January of a 2011 income tax hike will leave the state at least $4 billion short of needed revenue to support fiscal 2015 spending levels.