Illinois spreads tighten after tax rate announcement
CHICAGO — Illinois general obligation spreads tightened Friday on the short end as the market digested Gov. J.B. Pritzker’s announcement of a proposed graduated income tax rate structure to raise $3.4 billion of new annual revenue.
The tightening marked the first material movement in state spreads, though pension and budget plans Pritzker unveiled over the last two weeks provoked warnings of potential credit deterioration from two rating agencies if they are adopted.
On Thursday, Pritzker laid out a proposed income tax structure that marked the starting point for debate with lawmakers on a graduated income tax structure. A three-fifths supermajority of the General Assembly must approve putting a measure on the ballot that would allow the state to shed its flat income tax in favor of a graduated one. Then a three-fifths supermajority of voters must say "yes."
Municipal Market Data had observed only incremental spread changes in secondary market trading of the state’s GOs of late often driven by factors influencing the overall market.
“That changed on Friday,” MMD’s analyst team wrote in their Monday Municipally Speaking column. “With an explosion of generally positive trading it appears that the muni bond market likes what it is hearing.”
The trades prompted MMD to tighten spreads in the 2020-2022 range by eight to 10 basis points with the 2020 now at a 106 bp spread to the triple-A benchmark, the 2021 at a 142 bp spread, and the 2022 at a 151 bp spread. MMD did not change spreads further out on the scale where the 10-year is at a 185 bp spread and the 25-year is at 173 bps.
“Illinois still has the highest spreads among the fifty states” and it’s expected the state will “maintain this dubious distinction but spreads might tighten even further as the market assesses the new governor’s plans,” MMD said.
The new governor, a Democrat who enjoys Democratic supermajorities in the legislature, is in New York City Monday to meet with rating agencies to outline his fiscal plans ahead of the state’s first bond sale this spring.
Illinois is the lowest-rated state by several notches with its general obligation debt at Baa3 with a stable outlook from Moody's Investors Service, BBB with a negative outlook from Fitch Ratings, and BBB-minus and stable from S&P Global Ratings.
Pritzker promoted in his 2018 campaign plans to push for a graduated tax as a long-term fix to the state’s ills.
“The fair tax would eliminate the budget deficit, balance future budgets and reduce the pension liability by producing revenue of $3.4 billion," Pritzker said Thursay.
The state faces what is now a $3.2 billion deficit, an $8 billion unpaid bill backlog, and a $133.7 billion burden of unfunded pension liabilities. He crafted his proposed fiscal 2020 budget as a “bridge” to the adoption of graduated income tax rates.
The current individual rate of 4.95% would be replaced with rates that begin at 4.75% and top out at 7.95% with taxes remaining the same or being lowered for about 97%. The corporate income tax rate would go 7.95% from 7%.