CHICAGO, March 3 (Reuters) - Illinois and its biggest city, Chicago, will head to the supply-starved U.S. municipal bond market this month to sell more than $800 million of debt.
The state has set a $402 million competitive sale of taxable Build Illinois sales tax revenue bonds for March 11, according to the deal's preliminary official statement.
Chicago will sell $405 million of general obligation bonds through Wells Fargo Securities next week, a market source familiar with the deal said.
Sizable deals have been scarce, with issuance by states, cities, schools and others in the first two months of 2014 totaling just $32.4 billion, down 35 percent from the same period in 2013. February issuance was the lowest for that month in 14 years.
Illinois' sale on Feb. 6 of $1 billion of GO bonds drew $5.5 billion in orders as investors scrambled to buy debt.
Unlike Illinois' GO bonds, which carry the lowest ratings among all 50 states, the Build Illinois bonds, which are secured by state sales tax revenue, are rated higher, fetching ratings of AAA and AA-plus for a deal last year. Proceeds from the deal will continue funding for a state capital improvement program.
The finances of both Illinois and Chicago have been weighed down by big public pension funding problems.
The muni market was cheered by Illinois' passage in December of reforms aimed at easing the state's $100 billion unfunded pension liability. However, the law, which takes effect in June, is being challenged on state constitutional grounds in four lawsuits brought by state workers, retirees and unions.
On Monday, the Illinois Supreme Court consolidated all of the cases in Sangamon County Circuit Court in the state capital of Springfield.
Chicago, meanwhile, faces a $600 million state-mandated jump in pension payments next year and needs the state legislature to postpone the increase or pass reforms that would lower the city's contributions to its retirement systems.
Chicago's large and growing pension liabilities led Moody's Investors Service last July to drop its rating three notches to A3, with a negative outlook.
The city's bond sale consists of tax-exempt and taxable new and refunding bonds.
Illinois' upcoming bond sale precedes Governor Pat Quinn's fiscal 2015 budget address, which was postponed to March 26 from Feb. 19. The Democratic governor, who faces re-election this year, has projected income tax revenue will drop by $1.4 billion in the upcoming budget due to the partial expiration on Jan. 1 of tax rate hikes enacted in 2011.
A government finance watchdog group on Monday warned that a tax rate rollback would "dramatically destabilize Illinois' already weak financial condition."
The Chicago-based Civic Federation said the legislature should maintain the higher rates for another year, then gradually cut them, while applying the income tax to retirement income.