CHICAGO, June 27 While a legislative committee
reopened a debate on how to fix Illinois pensions, a panel of
municipal analysts said on Thursday that the state paid "dearly"
for its bond sale this week. Rising interest rates will only
increase the state's borrowing costs, the analysts added.
Investors demanded hefty yields to take on Illinois' $1.3
billion in tax-exempt general obligation bonds on Wednesday as
the state struggles with a huge unfunded public pension
liability that has eroded its credit ratings.
Interest rates in the deal topped out at 5.65 percent for
bonds due in 25 years, compared with 3.83 percent for top-rated
muni issuers. That resulted in a 182-basis-point spread over
Municipal Market Data's benchmark yield scale for triple-A-rated
bonds, up from the spread of 138 basis points that Illinois
bonds were fetching in the secondary market over Tuesday's
The state "went into an adverse market and this time, it did
cost them dearly," said Richard Ciccarone, a managing director
at McDonnell Investment Management, speaking during a panel
discussion sponsored by the Illinois Chamber of Commerce and
Reboot Illinois, a nonpartisan organization that works to get
the state's residents involved in its political process.
Ahead of the deal, yields in the $3.7 trillion market had
risen to levels not seen since 2011. The market, however,
reversed direction on Wednesday, easing yield levels a bit.
Illinois, which acknowledged the bond pricing cost the state
an extra $130 million over the life of the issue, forged ahead
with the deal because the bond proceeds were needed to fund
critical infrastructure projects that could not be stopped.
The taxable equivalent on the deal's 25-year yield was just
over 9 percent - a rate available only from the worst credits in
the corporate bond market, Ciccarone said.
Illinois' GO bond rating has slid down the credit scale to
the A-minus/A3 level with negative outlooks - the lowest among
U.S. states - as pension payments weigh down its finances.
Illinois' rating would have to fall four more notches to
reach the junk category.
If that happens, some investors would be forced to sell the
state's bonds, said Cadmus Hicks, a managing director at Nuveen
Asset Management. He pointed out that under that scenario, the
state's spread over MMD's scale could rise to 300 basis points -
a level paid only by Puerto Rico among large muni borrowers.
HEDGE FUNDS' INTEREST?
Ciccarone said interest rates, which have been rising on the
fear that the U.S. Federal Reserve will gradually scale back its
expansionary monetary policy, will make it increasingly more
difficult for Illinois to sell debt at reasonable rates. And
even though Wednesday's issue was oversubscribed with more than
$9 billion in orders, it likely attracted hedge fund buyers, who
could create more volatility for the state's debt - unlike
traditional buyers like mutual funds and individuals, he added.
Hicks said the state, which in the past turned to pension
bonds, skipped or skimped on its annual pension payments, should
take the first step of making actuarially required payments
Moody's Investors Service said on Thursday that Illinois'
pension burden is the largest among states. Its net pension
liability - the difference between projected benefit payments
and assets set aside to cover them - equals 241 percent of the
Governor Pat Quinn, who signed education funding bills for
the fiscal 2014 budget on Thursday, said pension payments were
hindering the amount of money the state could spend on schools.
"Lack of action on pension reform is squeezing out money
that should be invested in our critical priorities like early
childhood development, special education and scholarships for
students in need," he said in a statement.
An Illinois legislative conference committee, charged with
coming up with a pension solution for state lawmakers to vote on
by July 9, held its first meeting on Thursday. At a
standing-room-only hearing in Chicago, the 10-member bipartisan
committee heard from business groups, unions, state officials
and others about ways to tackle a nearly $100 billion unfunded
State Senator Kwame Raoul, a Democrat and the chairman of
the conference committee, said discussion will not be limited to
dueling pension-reform bills championed by the Democratic House
speaker and Senate president.
"There's a universe of options out there, and I think we do
ourselves a disservice not to consider them," Raoul told
reporters ahead of the hearing.
The committee will meet again on July 3, but it was unclear
if a pension proposal would be in place by the July 9 deadline.