CHICAGO – Illinois expects to close out fiscal 2013 with $1.3 billion more in income tax revenue than previously projected, offering investors a rare bit of positive state financial news just before a $300 million sales tax backed bond sale Thursday.
Gov. Pat Quinn announced the revised projection on Tuesday, and said the unexpected revenue would go to pay down the state’s bill backlog, which stood at $9 billion at the end of the last fiscal year. The state’s underfunded pension system and bill backlog are the two primary strains on Illinois’s single A general obligation ratings.
The additional revenue comes from the sale of assets, bonuses, or early dividends received by businesses and individuals seeking to have their income taxed at 2012 rates in anticipation of higher federal tax rates this year.
“While these additional dollars are good news and will aid in reducing some of what is owed, relying on a one-time fix will not help us in the long-run,” Quinn said. “This revenue will be used to help knock down our backlog of bills, but we must continue to focus on pension reform and restoring Illinois to full fiscal stability.”
The state was on pace to close out the current fiscal year with an $8 billion bill backlog. It drops to $7.4 billion in the next fiscal year and remains there through fiscal 2016, based on current three-year projections that take into account the partial expiration of the 2011 income tax increase in fiscal 2015.
While the state’s bill backlog and $95 billion of unfunded liabilities are straining the GO credit, the competitive sale Thursday for $300 million of taxable bonds offers a highly-rated sales tax backing. Market participants said investors would still demand some yield penalty because of the Illinois name, but it would fare well and draw strong interest.
Fitch Ratings and Standard Poor’s affirmed their AA-plus and AAA ratings, respectively. Moody’s Investors Service was not asked to rate the issue. The state has $2.3 billion of senior lien bonds issued under the Build Illinois program and another $400 million of junior lien bonds.
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 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. The state sold $375 million in a similar taxable deal in April 2012.
Sales tax collections can be volatile so the strong coverage and limited future issuance help the rating. “Revenues through the third quarter of fiscal 2013 demonstrate somewhat weaker 1.2% growth year-over-year,” Fitch wrote.
“The ratings reflect what we view as a diverse economic base and above-average income levels supporting sales tax collections, and extremely strong debt service coverage,” said Standard & Poor’s analyst Robin Prunty. “The ratings also reflect what we consider a strong credit structure that we believe insulates bondholders from economic and revenue volatility with an additional bonds test that substantially limits future leverage.”
The state is planning in the coming months a sales tax refunding in the $600 million range and a $1 billion new-money GO issue.