Illinois Taxpayers Penalized by Unpaid-Bill Backlog: Muni Credit
With its pile of unpaid bills growing about 30 percent this year, the weakest pension-funding ratio among states and falling federal aid, Illinois and its municipalities are paying a penalty above AAA debt that’s twice their five-year average.
Illinois plans to issue $1.8 billion of debt as soon as next week, yet asset managers such as Schroder Investment Management North America and BNY Mellon Wealth Management said they’re reluctant to buy.
“We’re not going to participate in this sale because we think the credit quality could get worse before it gets better,” said Eric Friedland, head of municipal credit research in New York for Schroder, which oversees $2 billion of munis.
Illinois state- and local-government bonds yield about 3.72 percent on average for 10-year maturities, or 1.66 percentage points more than AAA debt, data compiled by Bloomberg show. The gap is more than double the average since 2007. The extra yield for issuers from California, with a lower Standard & Poor’s credit grade, is within 0.05 percentage point of the average. The two have the lowest credit marks among states.
The extra yield helped bonds from Illinois beat the $3.7 trillion muni market in the past six months, 6.5 percent to 5.6 percent, according to Barclays Capital indexes tracking interest and price changes.
S&P may cut Illinois’s rating from A+, fifth highest, by multiple levels “if there is no progress on structural budget solutions and if Illinois does not address the significant pension liabilities and associated cost pressure,” the company said last week. California is graded A-, two steps lower, and S&P said in February the state may get a higher rating if revenue comes closer to Governor Jerry Brown’s projections.
While revenue from personal and corporate taxes grew last quarter, “Illinois’ financial position has not improved,” Comptroller Judy Baar Topinka said in a report yesterday. Unpaid bills rose by $1.3 billion to $5.6 billion since Dec. 31 and exceed $9 billion when including obligations such as Medicaid.
The Democratic-controlled General Assembly passed the 67 percent boost in income taxes in January 2011 and raised corporate income taxes 46 percent to help plug a projected $13 billion budget deficit.
“We have more credit concerns about Illinois than any other state, including California,” said David Litvack, senior tax-exempt research analyst at New York-based U.S. Trust, a unit of Bank of America Corp., in an interview. “We are cognizant that those are temporary,” he said of last year’s tax boosts.
Democratic Governor Pat Quinn last week proposed a voluntary 3 percent increase in pension contributions from current employees and lower cost-of-living increases for retirees.
“The comptroller’s report stresses the need to fix these challenges and fix them now,” Kelly Kraft, a spokesman for Quinn, said in an e-mail.
In fiscal 2010, Illinois had the lowest-funded state pension in the U.S., with assets equal to 45.4 percent of projected obligations, Bloomberg data show.
Investors aren’t convinced the state will act to shrink that deficit.
‘Guilt by Association’
“We’re not buying long-term Illinois anything, because of guilt by association,” said John Flahive, senior vice president and director of fixed income at BNY Mellon Wealth Management in Boston, which manages $22 billion of munis. “If we’re going to own it, we’re going to own it down the curve, predominantly inside of 10 years.”
Illinois sold $575 million of tax-exempt general-obligation bonds in March, with a 10-year part yielding 3.56 percent. That was 1.39 percentage points more than top-rated debt, according to a Bloomberg Fair Value index. That difference increased 25 percent from when the state sold debt in January.
At next week’s sale, Illinois may price bonds maturing in seven years or longer to yield as much as 1.70 percentage points above top-rated debt, said Tom Boylen, a trader at Chicago-based Performance Trust Capital Partners. That’s similar to where the securities have been trading, he said.
Following are pending sales:
LOUISIANA plans to sell $515 million in tax-exempt revenue bonds as soon as next week, according to an offering document. The debt will be used to refund securities and will be backed by gasoline and fuel taxes, the statement said. Moody’s Investors Service rates the bonds Aa1, second-highest. (Added April 24)
CENTRAL PLAINS ENERGY PROJECT will sell about $609 million in tax-exempt revenue bonds as soon as next week. The proceeds will be used to purchase a 30-year supply of natural gas from J. Aron & Co. A group of utilities and municipalities in Nebraska, Iowa and South Dakota will take delivery of the fuel. Moody’s Investors Service assigned the debt a rating of A1, fifth- highest. Goldman Sachs Group Inc., which owns J. Aron, and RBC Capital Markets, are managers on the deal. (Added April 19)
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