CHICAGO - Illinois on Thursday will competitively sell $1.4 billion of general obligation cash-flow certificates that mature next year in an attempt to whittle down a record backlog of $4 billion of unpaid bills.
The notes mature in three tranches in 2009 - $400 million due April 24, $600 million due May 25, and the remaining $400 million due June 24, according to the offering statement. The deal is the first certificate issue since 2003 for cash-flow purposes, although in recent years the state has used certificates to fund payments under its hospital assessment tax program.
With some issuers recently cutting the size of pending transactions and the Port Authority of New York and New Jersey failing last week to receive any bids on its taxable note issue, Illinois finance officials have been watching the market closely and feel comfortable that the deal will attract sufficient interest.
"We feel that given the maturity, sizes, and duration of the notes that the state will receive strong bids. We have already seen strong interest from the usual players," said state debt manager Phil Culpepper.
Gov. Rod Blagojevich said in a statement: e_SDLqUnfortunately, the national recession has negatively affected Illinois' revenue sources and cash flow. Especially in this poor national economy, Illinois needs to make sure that we can pay the businesses that provide the state with the goods and services which help families in these tough times."
State Comptroller Dan Hynes and Treasurer Alexi Giannoulias have signed off on the borrowing as required under state law.
The governor promoted the borrowing late last month as he announced a looming $2 billion budget deficit through the next fiscal year. The financing was one of four proposals floated to address the state's fiscal turmoil. He called for additional departmental spending cuts, called on the federal government to supply more aid, and is seeking legislative authority to withhold 8% of general fund spending.
The upcoming certificate issue will be repaid within the current fiscal year. Ice Miller LLP is bond counsel. Under current law, Illinois must limit issuance in anticipation of revenues to no more than 5% of the state's appropriations for the fiscal year and the notes must be repaid from revenues received during the same fiscal year. The state's fiscal year ends June 30.
As he reported the $4 billion backlog in bills, Hynes last month said the General Assembly should change the state's debt statutes to extend that period. Officials are also looking at that existing statute, which some believe may permit repayment in the same calendar year. Hynes also wants the state to establish a revolving line of credit to deal with cash-flow issues.
Although Illinois does receive more revenue in the spring months, Hynes is concerned that given the magnitude of the backlog, the traditional certificate issue would fall short of addressing the state's liquidity problems.
"It will not allow sufficient liquidity or flexibility since the state would have to immediately begin allocating almost all remaining fiscal 2009 revenues," the comptroller said in a letter to the governor and lawmakers last month.
Fitch Ratings and Standard & Poor's rate Illinois' $25.5 billion of GO debt AA, with Fitch assigning a negative outlook, while Moody's Investors Service rates the state Aa3. Short-term ratings had not been released as of press time Friday.
The state did receive some good news last week from the federal Centers for Medicare and Medicaid Services, which approved the state's $3.85 billion, five-year hospital assessment program aimed at leveraging additional federal funds.
Blagojevich signed the program into law over the summer. The program will leverage about $640 million annually for hospitals and another $130 million for long-term care and other health programs. It replaces an expired three-year program that leveraged about $465 million more a year for hospitals. That program, along with a one-year predecessor, leveraged a total of about $2.3 billion for hospitals and state health programs.
Authorization for the first year of the program was included in the fiscal 2009 budget. Under the program, Illinois assesses a tax on hospitals based on volume, with the rate set at $218.38 annually per occupied hospital bed, excluding Medicare beds. The federal government matches much of the assessments and the state then distributes the assessment payments and most of the matching federal funds back to hospitals.
The additional funds are distributed over the course of the year and the amount hospitals receive is based on their level of services provided to Medicaid and other factors such as their location in rural areas.
Hospitals, especially those already fiscally struggling with growing costs for covering the uninsured and under-insured, have grown accustomed to the additional federal funds over the last five years and had eagerly awaited passage of a new program.
Rating agency analysts who review Illinois hospital credits have also followed the legislative process, given the fiscal strain some hospitals would face absent the additional funds. The program was pushed by state Sen. Jeffrey Schoenberg, D-Evanston, and Rep. Barbara Flynn Currie, D-Chicago.
"With this infusion of funds, our hospitals will be able to continue providing life-saving but extremely high-cost services such as trauma care, neonatal intensive care, and care for burn victims," the Illinois Hospital Association said in a statement.
While Illinois in recent years has issued certificates structured like the upcoming issue to expedite payments owed to hospitals, Culpepper said the state is reviewing its options and has no immediate plans to borrow.