CHICAGO — With the market focused on Illinois ahead of a Tuesday vote on a pension system fix, the state has announced plans to take competitive bids on $350 million of taxable general obligation bonds next week to meet ongoing capital funding needs.
The state had been pondering a final 2013 deal for some time, depending on the funding needs of ongoing capital projects, including ones in the state's $31 billion capital program.
The state will publish an offering statement Tuesday on the sale slated for Dec. 12, said state capital markets director John Sinsheimer.
If lawmakers act during a special session set for Tuesday on a bipartisan plan struck by the General Assembly's four leaders last week, the state would issue a supplement to the offering statement providing investors with information on the plan. The overhaul would trim cost-of-living increases, raise retirement ages, and restructure state and employee contribution formulas.
The legislation's fate remained uncertain Monday amid a full court press by unions to reject it. Passage would probably have a positive impact on bids, according to Sinsheimer. "I would hope we would get some improvement in our spreads," he said.
Many issuers consider year-end sales tricky given the market's attention span and investment needs, but the state faces a pension reporting blackout period in the coming weeks that would continue through much of January. The blackout is tied to an actuarial review to finalize the state's fiscal 2015 contributions.
"There's not an urgency for the funds but we if don't do the sale now we have to wait until January," Sinsheimer said.
The state opted to tap the taxable market as some of the project funding and grants would not qualify for tax-exemption based on their timing and other factors. With the spreads between taxable and tax-exempt yields still narrow, the state opted against splitting the deal into two separate pieces.
Rating agencies had not yet released reports on the upcoming issue as of Monday. The state carries low-single-A level ratings and a negative outlook from Fitch Ratings, Moody's Investors Service, and Standard & Poor's, primarily over its $100 billion of unfunded pension obligations with a system just 39.3% funded.
Even if the pension bill fails, the rising political tide to deal with the pension mess could benefit the upcoming deal, according to Municipal Market Advisors. In its weekly outlook published Monday, MMA said Illinois bonds may be set to outperform through year end.
"From a market perspective, we expect trading in state of Illinois bonds will reasonably improve in the near term as the proposal and associated political momentum imply reduced risk of rating downgrades near term," the report read. "As usual, momentum in pension funding is likely a more important factor to investors than the absolute level of funding status."
The report cautioned that positive impact could be limited if the legislation fails given "reasonable investor cynicism" and the resulting pressure on the state budget. "Gains will be limited if crossover investors" like hedge funds "fail to participate in a meaningful way," it read.
Investor cynicism is driven by repeated failed legislative stabs at reform over the last two years. The new plan would trim an estimated $160 billion off state contributions with full funded status reached by 2044.
Municipal Market Data said last week Illinois has the widest state GO spread to the MMD benchmark of any state with a tax-exempt bond maturing in 2025 trading at a 175-basis-point spread while longer bonds traded at spreads of up to 152 basis points.