CHICAGO, March 10 Illinois is paying an extra
premium in the U.S. municipal bond market because of its poor
fiscal reputation, according to a study released on Monday.
The state's general obligation bonds fetch higher yields in
secondary market trading than other states as festering fiscal
problems, including a big backlog of unpaid bills, have given
Illinois the lowest credit ratings among U.S. states.
Illinois' GO bonds due in 10 years yielded 120 basis points
over Municipal Market Data's benchmark triple-A yield scale in
the week ended Feb. 28. Illinois has the widest so-called credit
spread after Puerto Rico among major muni debt issuers tracked
by MMD, a unit of Thomson Reuters.
But an analysis by the Fiscal Futures Project at the
University of Illinois' Institute of Government and Public
Affairs found that even after controlling for different credit
ratings and fiscal, economic and financial factors between
Illinois and other states that sold GO bonds between 2005 and
2010, the yields on Illinois bonds were still higher.
"These findings suggest the presence of a reputational risk
premium on Illinois debt that is in excess of the risk premium
associated with the state's actual default risk," the analysis
The premium for Illinois was 21 basis points for bonds due
in five years, 12 basis points in 10 years and 7 basis points in
20 years, according to the analysis. It added that the premium's
present value cost "could be well over $80 million" on the more
than $10.4 billion of GO bonds Illinois sold between 2005 and
Martin Luby, an assistant professor at DePaul University's
School of Public Service who co-wrote the study, noted that
Illinois' fiscal standing deteriorated after 2010 as the state
failed to address its huge unfunded public pension liability,
prompting downgrades from the credit ratings agencies.
"We think this risk premium is a conservative estimate," he
In December, the state finally enacted comprehensive pension
reforms aimed at easing a $100 billion pension funding
However, state workers, retirees and labor unions have filed
five lawsuits challenging the law on state constitutional
As the muni market waits to see if the law will be upheld by
state courts, Illinois must also deal with income tax rate hikes
enacted in 2011 that will partially expire halfway through the
state's next fiscal year.
A rollback in the rates would cut revenue by an estimated
$1.4 billion in fiscal 2015.