CHICAGO — Illinois will kick off the new year with a competitive general obligation issue on Jan. 11 of between $500 million and $750 million to fund its ongoing public works program.

The deal will include about $250 million of taxable debt to fund approved projects that don’t qualify for tax-exempt financing under Internal Revenue Service rules, said the state’s director of capital markets, John Sinsheimer.

The size of the tax-exempt piece is not yet final. “We are looking at cash flow and what projects are ready to go,” Sinsheimer said.

Acacia Financial Group is serving as financial adviser based on a rotation list of six qualified advisory firms selected through a request for proposals process earlier this year that established new underwriting, advisory and legal pools.

The state will then take a break from bonding for its ongoing $31 billion public works capital program until March to update its financial disclosure following Gov. Pat Quinn’s state of the state address scheduled for Feb. 1 and the release of his proposed fiscal 2013 budget on Feb. 22.

“We can’t go to market until the market has time to digest the budget,” Sinsheimer said.

The March GO bond sale could reach about $750 million. It will be the state’s first negotiated sale using the new underwriting pools. A drawing established the rotation list. Ramirez & Co. is first up as senior manager. Public Resources Advisory Group is financial advisor.

Mayer Brown LLP is bond counsel on both deals. Illinois opted to go with one bond counsel during the RFP process to ensure consistency in its disclosure.

The state uses a mix of negotiated and competitive sales for its GO and sales tax-backed borrowing as dictated by state law that requires a certain percentage of annual borrowing be competitively bid.

The state could possibly borrow another $1 billion of new-money GO and sales tax-backed Build Illinois bonds before the end of the fiscal year on June 30, depending on cash-flow needs of projects in the 2009 Illinois Jobs Now capital program.

“We would anticipate more cash demands since we are coming out of the design phase and entering into the construction phase for many projects,” Sinsheimer said.

Separately, Illinois officials expect in late spring or early summer to tap the $2.4 billion unemployment bonding authorization approved by lawmakers and signed by Quinn last month.

Though the state won’t necessarily stick with the rotation list, Sinsheimer said he intends to pick a team from the existing pools to select two book-runners for the transaction.

Ahead of the deal, Illinois would send out a brief questionnaire to the firms in the senior manager pool — with the exception of Ramirez — to determine a firm’s experience in unemployment transactions.

“There’s a high degree of structuring, so we want to identify a firm’s experience,” Sinsheimer said.

The final level of borrowing is still undetermined, as it will depend on how much debt is owed to the federal government at the time of the deal. The goal is to restore the Illinois unemployment trust fund to solvency by lowering borrowing costs.

Until last January, the loans were interest-free due to a stimulus act provision. Now many states, like Illinois, face interest payments of 4.1% starting this year.

Without action, businesses across the state face a greater burden in funding the trust. The legislation is expected to save $240 million in interest. It leaves existing benefits intact and staves off increased business taxes. The bonds would be repaid with standard business payments into the trust fund.

Rating agencies are expected to release updated reports on the state’s GOs ahead of the Jan. 11 issue. Illinois’ $31 billion of GOs are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.

The upcoming GO sales will provide the first test in months of investor confidence in Illinois’ credit. Investors in 2010 demanded steep interest rate penalties for state bonds as it struggled with liquidity and faced a $12 billion deficit. The spreads have narrowed this year since the state enacted an income tax hike in January that is expected to generate $6.8 billion annually.

Illinois carried about $5 billion of overdue bills into the current fiscal year and expects to close it out owing billions. The Civic Federation of Chicago, which tracks government spending, has estimated the state will close out the year with a $5 billion operating deficit.

Illinois also faces mammoth unfunded pension obligations of $75.7 billion, based on fiscal 2010 figures. An updated actuarial figure based on fiscal 2011 results is expected to be included in the state’s next offering statement.

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