CHICAGO - In a borrowing previously stalled last June by a legislative impasse over the fiscal 2010 budget, Illinois will competitively sell $1.25 billion of general obligation cash-flow certificates on Thursday to pay down bills carried over from last year.
The transaction is divided into three maturities, with $500 million coming due on March 23, another $250 million due on April 13, and the final $500 million due on June 10, according to the preliminary offering statement. Pugh, Jones, Johnson & Quandt PC is bond counsel.
"The maturities were structured to best meet cash inflows taking into consideration the May short-term borrowing that is still outstanding," said state debt manager Phil Culpepper. Illinois sold $1 billion of certificates that mature on two equal pieces on April 26 and May 20 next year.
The state initially contemplated the two sales totaling $2.25 billion last spring as officials grappled with a $12 billion deficit and Gov. Pat Quinn continued to push lawmakers to support his proposal to raise income taxes.
Illinois wanted to issue all the debt in fiscal 2009, before it ended June 30, and repay it in the current fiscal year, a move permitted under a provision in state rules that allow for short-term debt - up to 15% of appropriations - to be repaid over a year's time in the case of a fiscal emergency or failure of revenue. The state's traditional short-term borrowing rules require the debt to be repaid in the same fiscal year.
The second piece of the transaction was put on hold as officials froze any borrowing plans until an agreement was reached on a new fiscal 2010 budget. Quinn and lawmakers in early July agreed to a $54 billion budget that did not include an income tax increase. Instead, it relied on spending cuts and one-time maneuvers like issuing $3.4 billion to cover a portion of the state's pension payment, as part of the plan to reduce the deficit. Lawmakers will need to address the state's revenue situation, however, early next year as the current budget puts it on track to end the fiscal year with a $3.4 billion deficit.
The state will close on the new transaction later this month, ahead of the end of Illinois' so-called lapse period for spending. Under that policy, the state can pay bills incurred in fiscal 2009 with fiscal 2010 revenues for up to 60 days after the end of the prior fiscal year. The state closed out the fiscal year with nearly $4 billion in unpaid bills.
The transaction is the first in a series of financings planned this year. They are expected to include new-money issuance to help finance the $31 billion capital program recently signed into law by Quinn, a debt restructuring and the pension bonds. It is the first deal since Fitch Ratings late last month downgraded the state's GO rating two notches to A. Moody's Investors Service in April lowered the state's rating one notch to A1. It then last month placed the credit on watch for a possible downgrade. Standard & Poor's downgraded the state to AA-minus in March.
Illinois has asked only Fitch and Standard & Poor's for short-term ratings for the certificate deal. The state's $1.4 billion certificate issue in December drew little market interest when it sold after Moody's stripped the state of its top short-term ratings. The downgrade cut into the deal's appeal with money market funds as any further credit deterioration would force that class of investors to sell the debt.
The state's May certificate issue fared better in attracting bidders. One piece attracted six and paid 1.80%. The other had seven bidders and paid 1.9%. Sizeable fund balances in non-general fund accounts help boost the state's ability to repay the notes even in a cash crunch.