CHICAGO Feb 5 A looming revenue decline, heaps
of unpaid bills and multiple lawsuits hang over Illinois'
planned $1 billion bond sale on Thursday, though the
fiscally-challenged state's recent pension reform law may afford
it a modest break on borrowing costs.
Though it still pays more than any other state, Illinois saw
its 10-year borrowing premium slip to 120 basis points over
top-rated municipal bonds in recent weeks, down from more than
170 basis points late last year.
A long-awaited pension reform law enacted in December with
an effective date in June may have helped the state, which has
the lowest credit rating among all 50 U.S. states.
Even so, there is plenty for investors to worry about.
Enactment of the pension reforms, which are projected to save
the state nearly $145 billion over 30 years, has sparked four
lawsuits by labor unions and others.
Illinois also faces a $1.4 billion drop in revenue in the
upcoming fiscal year as some big income tax rate hikes enacted
in 2011 are scheduled to partially expire on Jan. 1, according
to projections released by Quinn's budget office last month.
In fiscal 2016, the first full year of the rate rollback,
income tax collections are forecast to fall by another $2.7
billion. That would help to more than double a projected deficit
in the state's $37 billion general funds budget to $4.1 billion
from $1.9 billion in fiscal 2015, which begins July 1.
"They still have wood to chop," said Paul Brennan, a senior
vice president and portfolio manager at Nuveen Investments.
"Pensions are still eating a lot of their general fund revenue
and they still have forward-looking deficits they have to
Standard & Poor's downgrade of Puerto Rico on Tuesday may
also prompt hesitation if buyers are wary of new bonds from
That said, Illinois could benefit from the low level of
supply in the $3.7 trillion market so far this year, and its
bonds could stand out for investors hunting for yield, said Dan
Solender, head of municipal investments at Lord Abbott & Co.
"It's probably a good time to bring a deal," he said.
The general obligation bond issue, the state's first
tax-exempt deal since December, is structured with serial
maturities from 2015 through 2034 and term bonds due in 2039,
according to the preliminary official statement.
John Sinsheimer, the state's capital markets director, said
pricing through lead manager Citigroup was still on track.
But how the state will deal with its projected revenue loss
is seen as a key question for the fiscal 2015 budget. Democratic
Governor Pat Quinn this week asked the legislature to delay his
fiscal 2015 budget address to March 26 from Feb. 19.
The Democrat-controlled legislature could vote to keep tax
rates where they are.
However, Michael Madigan, the powerful speaker of the
Illinois House of Representatives, last week introduced a bill
to permanently and retroactively reduce the corporate tax rate
to 3.5 percent - lower than the 4.8 percent rate in place prior
to the 2011 tax hike - which would cut revenue by about $1.5
Under current Illinois law, the rate on business profits is
scheduled to drop to 5.25 percent from 7 percent on Jan. 1. The
personal income tax rate will fall to 3.75 percent from 5
The state has managed to shrink its pile of unpaid bills,
which stood at $4.7 billion on Tuesday, according to the
Illinois Comptroller's website, down from $6.1 billion at the
end of fiscal 2013.
But implementation risk for the pension reforms along with
uncertainty over the future of the tax hikes have led credit
ratings agencies to keep negative or developing outlooks on
Illinois' A-minus and A3 ratings.
Political wrangling is likely to heat up as well. Quinn is
up for re-election this year and four Republicans will face off
in a March 18 primary for the right to challenge him in
Quinn is facing a relatively weak challenge for the
Illinois Senate Republican Leader Christine Radogno has said
Quinn's delaying the budget until after the primary was done for
"purely political purposes," and was not fair to taxpayers.
Brooke Anderson, Quinn's spokeswoman, said Quinn wants more
time to review the latest economic and revenue data and to
prepare a five-year budget blueprint. She also denied the later
date had anything to do with Quinn's bid for re-election.