Illinois Offers $500 Million Debt After Pension Fix Fails

Illinois plans to issue $500 million of general-obligation bonds as soon as Jan. 30 in the first sale since lawmakers failed to restructure the lowest-funded state retirement system in the U.S.

The bonds will be offered by competitive sale, with proceeds used for school construction and transportation improvements, according to John Sinsheimer, the director of capital markets. It’s the first issuance this year by the state, which may sell about $2 billion of debt in 2013, he said.

The yield penalty on debt sold by Illinois and its localities widened to the most in a month since lawmakers ended their 2012 session on Jan. 8 without acting to shore up the state’s pensions. The premium to AAA munis grew to 1.47 percentage points on Jan. 18, the most since Dec. 12, according to data compiled by Bloomberg.

“The bidders are sophisticated buyers,” Sinsheimer said. “We’ll be interested to see how the spreads come out.”

The bonds will have maturities ranging from one year to 25 years, according to Sinsheimer.

Illinois is the lowest-rated U.S. state by Moody’s Investors Service at A2, five steps below Aaa. Moody’s, Standard & Poor’s and Fitch Ratings all have a negative outlook on the state, showing potential for further downgrades. Its pension systems face a $97 billion unfunded liability that rises by $17 million each day.

The state’s plans have just 39 percent of the assets needed to cover projected obligations for five major groups of public employees, according to the Civic Federation, a Chicago-based nonprofit research group.

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