Illinois Sells $250 Million Bond in Third Deal Since Pension Fix

Illinois issued $250 million of tax-exempt bonds in its third general-obligation sale since lawmakers passed a bill in December to repair the worst-funded U.S. state pension system.

The competitive deal included a portion maturing in April 2024 that priced to yield 3.42 percent, data compiled by Bloomberg show. The interest rate is 0.92 percentage point more than benchmark munis. The state issued 10-year debt two months ago with a spread of 1.11 percentage points.

Today’s sale from the fifth-most-populous state follows general-obligation borrowings of about $1 billion in February and $350 million in December, when Illinois lawmakers approved retirement-system changes designed to save $145 billion over 30 years. Yield spreads on those deals fell 26 percent and 29 percent, respectively, from similar offers in 2013, Bloomberg data show.

The bond deal, for which Bank of America Corp. won the bid, is a barometer of whether investors in the $3.7 trillion municipal market will reward Illinois after Democratic Governor Pat Quinn last month proposed to keep an income-tax increase that expires at year-end.

The state’s Democratic-led legislature passed the boost in January 2011 to help close a $13 billion budget deficit. Lawmakers increased the personal-income tax rate to 5 percent from 3 percent, the largest jump in state history. A roll-back would create a shortfall of about $2 billion in fiscal 2015.

Illinois Reward

While the yield penalty on Illinois debt is higher than any of the 17 U.S. states tracked by Bloomberg, it has narrowed 36 percent from an October peak of about 1.9 percentage points.

Illinois bonds have outpaced this year’s muni rally, gaining 4.5 percent to the overall market’s 4 percent advance, S&P Dow Jones Indices data show.

The pension law and Quinn’s tax proposal haven’t changed Illinois’s standing as the lowest-rated state. It has an A-grade from Standard & Poor’s, six levels below the top. The state’s fiscal stability is approaching a pivotal point in the next 50 days, the New York-based company said yesterday.

Moody’s Investors Service and Fitch Ratings give the state an equivalent rank. Moody’s last month dropped Chicago, the state’s most-populous city, to Baa1, three steps above junk.

The lower borrowing costs in the state’s prior two sales will save taxpayers more than $80 million in interest payments, according to Abdon Pallasch, Illinois’s assistant budget director.

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