CHICAGO — Illinois will take competitive bids Thursday on $50 million of debt in its first new-money general obligation sale of the new fiscal year, coming after the state’s latest downgrade.

The bonds mature serially between 2013 and 2022 and will finance technology-related projects.

“Our statutes for technology projects limit us to a 10-year final maturity,” said state director of capital markets John Sinsheimer.

Rules requiring the state to structure its bonds with level principal payment make it complicated to include the technology borrowing in the state’s larger GO issuance.

Peralta Garcia Solutions is advising the state and Mayer Brown LLP is bond counsel. The state finance team does not anticipate additional new-money or refundings until 2013 with the size of any new-money borrowing dependent on cash flow needs for projects in the state’s ongoing $31 billion capital program, Sinsheimer said.

Ahead of the sale, which follows a failed legislative special session last month on pension reform, Standard & Poor’s lowered Illinois’ rating one notch to A.

By leaving a negative outlook on the rating, S&P warned of possible further rating actions, absent some movement on pension reform or budgetary changes to address the fact that portions of the state’s 2011 income-tax hike expire in 2015. Only California is rated below Illinois, at A-minus by S&P. California and Illinois are the only states in the single-A category.

“The downgrade reflects the state’s weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Standard & Poor’s credit analyst Robin Prunty. “The downgrade also reflects continued financial weakness despite significant measures in the past two years to improve structural budget performance.”

The negative outlook reflects the possibility of further erosion of the state’s pension funds and the uncertainty and risk to future budget performance as portions of the tax hikes — which generate $6 billion to $7 billion annually — expire.

The state is weighed down by $83 billion in unfunded pension liabilities for a 43% funded ratio that is the worst among states. It faces skyrocketing pension payments that rose $1.1 billion to $5 billion in the current $33.7 billion budget.

Political bickering over reforms derailed a pension overhaul during the General Assembly’s annual session this spring and no agreement could be reached as lawmakers met in a special one-day session last month.

Gov. Pat Quinn has stressed the fiscal accomplishments of the spring session, including a $2.7 billion Medicaid overhaul and allocation of $1.3 billion to pay down an $8 billion bill backlog. He plans later this week to announce details of a grassroots campaign to drum up public support for reform. No legislative action is expected before the November election and some elected officials have said a deal is more likely early next year.

Moody’s Investors Service called the failed special session a drag on the state’s credit, but earlier this week affirmed its A2 rating on $32.8 billion of Illinois’ rated debt. Its Moody’s lowest rating for any state. Fitch Ratings assigns an A rating and stable outlook. The state has $27 billion of GO debt.

Illinois Comptroller Judy Baar Topinka in a statement pressed lawmakers to act.

“The rating agencies have made it clear that continued delay will trigger another downgrade,” she said. “We cannot afford that — it is time to set aside the posturing and get this done” she said.

Although Illinois pays a penalty to borrow, it has benefitted from both the near record low interest rates and investor interest in the extra yield offered by the state’s paper.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.