Illinois sets timing of next GO sale to get moving on capital package

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Illinois will take competitive bids next month on $750 million of general obligation paper, the state’s first offering to help fund the six-year, $45 billion infrastructure program enacted during the legislature’s spring session.

“For far too long, maintenance has been deferred, critical repairs have gone undone and our infrastructure needs have been ignored. Not anymore,” Gov. J.B. Pritzker said in a statement announcing the planned sale.

The state will take competitive bids Nov. 6. The timing of an up to $1.2 billion borrowing approved as part of the state’s budget package in the spring to help pay down the state’s current $6 billion bill backlog has not yet been set.

The $750 million issue is the state’s first of the fiscal year, so it must be sold competitively under state rules that require a portion of all borrowing during the year be competitively bid.

Chapman and Cutler LLP and Hardwick Law Firm LLC are co-bond counsel and PFM Financial Advisors is advising the state. S&P Global Ratings and Moody’s Investors Service rate the state at the lowest investment level with a stable outlook. Fitch Ratings assigns the state’s GOs a rating one notch higher at BBB and since the last deal has shifted the outlook to stable from negative.

The deal is the first for the state since a spring sale that came ahead of the filing of a lawsuit by a conservative policy group and New York-based policy group challenging repayment of $14.3 billion of GO debt.

The state’s secondary market spreads shot up over the summer and have recovered some of the lost ground, but not all, since a state judge denied the lawsuit’s filing as a taxpayer action. The policy group will file its formal appeal next month.

The spread on an eight-year bond in an April deal with a 5% coupon landed at 178 basis points to Municipal Market Data’s AAA benchmark. A 2016 deal that came amid an ongoing budget impasse saw the 10-year land at a 192 basis point spread.

Secondary market spreads hit a high as the state headed toward a third fiscal year without a budget in June 2017 of 273 bps. After passage of a budget in July 2017, spreads have steadily narrowed. They hit a low of 139 basis points last spring as the state benefited from passage of a budget balanced on a cash basis and steep demand for higher-yielding paper. After the lawsuit’s filing in early July, spreads shot up to a 175 basis point spread.

The administration bills the new “Rebuild Illinois” capital plan as a “historic” investment in roads, bridges, railways, broadband, universities, early childhood centers and state facilities, creating and supporting an estimated 540,000 jobs over the life of the plan.

The capital plan passed with bipartisan support ended a long drought in new capital spending with the last package — a $31 billion program known as Illinois Jobs Now — approved in 2009. The plan relies on nearly $21 billion in borrowing, $10 billion in federal funds, $11 billion in pay-as-you-go financing, and $2.6 billion in local matching funds.

About 33% of the transportation or horizontal projects are to be bond funded compared to the vertical projects of which 85% rely on borrowing.

“The underperformance of similar revenues supporting the Illinois Jobs Now plan has for years forced the state to backfill the capital projects fund with general funds revenues in order to honor debt service requirements,” the Chicago Civic Federation said in a detailed report on the plan. “The state will need to carefully manage the pace of bond issuance and construction to avoid having the Rebuild Illinois plan repeat the mistakes of its predecessor.”

Transportation, or horizontal projects, receive $33.2 billion of funding, with roads and bridges accounting for $25.3 billion, mass transit $4.7 billion and other projects making up the remaining $3.2 billion.

They will be funded with an initial $1.3 billion generated annually through a doubling of the motor fuel tax to 38 cents per gallon with future increases then indexed to inflation. An increase in vehicle registration fees, an increase in diesel fuel tax, an increase in registration fees for electric vehicles, an increase in truck registration fees also will fund projects and the state’s sales tax revenues on gasoline will move to the road fund in fiscal 2022.

When fully implemented the sources will generate $1.9 billion annually.

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Primary bond market Infrastructure State and local finance Illinois