CHICAGO — Moody's Investors Service said Monday it views Illinois' successful sale of $1.46 billion of tobacco bonds to pay down overdue bills as a credit positive even though the borrowing falls into the deficit financing category that rating analysts typically frown on.
In Illinois' case, however, the positives of the sale outweigh the negatives because the fiscal 2011 budget relies on the tobacco issue to help pay off fiscal 2010 bills by a state-mandated Dec. 31 deadline. The state has a backlog of nearly $6.4 billion in bills, including $1.18 billion incurred in the last fiscal year, which ended June 30. Moody's rates the state's general obligation debt A1 with a negative outlook.
"The successful execution of this sale is a credit positive," Moody's wrote in a special comment in its weekly credit outlook. "The tobacco bond proceeds, which will become available after the tobacco settlement bonds' Dec. 8 closing, appear sufficient to complete payment of these past-due bills."
About $1.7 billion of the newer fiscal 2011 bills are owed to the state's pension funds. The fiscal 2011 budget approved by lawmakers and signed by Gov. Pat Quinn earlier this year does not identify how the state intends to fund a total of $4.2 billion in pension payments. Some of the state's pension funds have been forced to sell off assets to cover expenditures due to government payment delays.
Quinn is pressing for legislative approval to issue $3.8 billion of eight-year GOs to fund the payments. The House has approved the borrowing, but more support is needed in the Senate.
The proposed pension bonds underscore the state's financial weakness, but Moody's said they would "at least limit deterioration in the funded status of the state's pensions, which are the lowest-funded among states."
Illinois sold $3.5 billion of five-year GO notes to cover much of its fiscal 2010 pension payment. The state's mammoth unfunded pension liabilities of $62.4 billion and its reliance on borrowing to cover the fiscal 2010 payments along with other one-shot revenues like the tobacco bond sale in recent state budgets were factors that contributed to a series of rating downgrades.
Illinois lawmakers ended a week-long veto session last week without tackling the pension bond borrowing or a proposed income tax increase that would help reduce the deficit into the next fiscal year. Quinn is expected to press for passage of both during a lame-duck session in early January before the new General Assembly convenes Jan. 12.
The budget gap is estimated to be as much as $15 billion.
Already stung by a series of downgrades, the state's credit could slide further if lawmakers do not take steps to chip away at the budget's structural problems, analysts have warned. Fitch Ratings rates the state's $25 billion of GO debt A, with a negative outlook and Standard & Poor's rates the state A-plus, but has it on negative watch for downgrade.
The tobacco bonds were sold through the state's Railsplitter Tobacco Settlement Authority last week, with the longer 17-year bonds priced to yield 6.2%. Though the rate is significantly higher than similarly rated credits, the deal was considered well received, given the tobacco sector's struggles.
The bonds are backed solely by the state's share of its Master Settlement Agreement payments. Illinois received $284 million this year and expects to receive $305 million next year.