Illinois $2.5 Billion Plan for Bills Viewed as ProgressBrian Chappatta and Mark Niquette
Illinois’s plan to chip away at its $9 billion bill backlog with a $2.5 billion bond sale is earning praise from investors, who view the move as a sign lawmakers are taking steps to repair state finances.
A House of Representatives committee passed the measure, which has support from Speaker Michael Madigan, a Democrat. The proposal comes after lawmakers in both chambers last month passed bills to rein in retirement costs. The House version would cut Illinois’s unfunded obligations by $20 billion immediately and save $100 billion over 30 years, Democratic Representative Elaine Nekritz said.
“Their unpaid bills are a huge outstanding issue and their underfunded pension is a huge issue, and they’re taking steps now to address both of them,” said Clark Wagner, director of fixed income at First Investors Management Co. in New York, which manages $1.6 billion of munis. “I don’t think it’s a negative from a ratings point of view.”
Illinois has the lowest rating among U.S. states by Moody’s Investors Service and Standard & Poor’s, and both companies have it on negative outlook, meaning the grade could be cut further.
“The state’s chronic use of payment deferrals as a cash-management tool has contributed to the state’s four downgrades in the past four years,” Ted Hampton, a Moody’s analyst, said in an e-mailed statement. “This kind of proposal would clearly add to the state’s long-term debt burden.”
Olayinka Fadahunsi, an S&P spokesman, didn’t return an e-mail seeking comment on the bill. Fitch Ratings, which grades Illinois A, sixth-highest and one step above California, wouldn’t downgrade the state just because of the proposed debt issuance, said Karen Krop, an analyst.
A $2.5 billion general-obligation sale would be the state’s biggest since February 2011, when it issued $3.7 billion of taxable securities, data compiled by Bloomberg show. Illinois plans to sell an additional $1 billion to $1.2 billion in debt this year to finance projects, according to John Sinsheimer, the state’s capital markets director.
The amendment authorizing the additional borrowing passed 6-4 in the House Revenue and Finance Committee yesterday, with all Republicans voting no. As much as $2 billion would go to pay Medicaid providers and $500 million to other health providers, said House Majority Leader Barbara Flynn Currie, a Chicago Democrat who introduced the provision.
While interest would be about $40 million, the state would avoid about $20 million in late-payment fees, Currie said.
There are 153,656 unpaid bills the office of Illinois Comptroller Judy Baar Topinka, who opposes the borrowing, said Brad Hahn, a spokesman. The backlog is about $9 billion, according to her website.
The fifth-most-populous state issued $800 million of general-obligation bonds April 2, after postponing a January sale following a downgrade by S&P. Buyers demanded 1.33 percentage points of extra yield above benchmark munis for 10-year Illinois tax-exempt debt, almost triple the penalty on California a month earlier.
Illinois in January 2011 raised the personal income tax rate to 5 percent from 3 percent and the corporate rate to 7 percent from 4.8 percent. The increases are to expire after 2014. That reduces the legislature’s ability to collect additional revenue to curb the bill backlog, said Eric Friedland, head of muni research in New York at Schroder Investment Management North America.
“The number of solutions that they have to address the accumulation of unpaid bills is limited,” said Friedland, whose company oversees about $2 billion in munis, including Illinois general obligations. “This may be the least likely to cause additional financial stress.”
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