Tapping the brakes on Illinois debt?

January 5, 2012

Illinois, the state in the weakest fiscal position, is planning two big bond deals in the first quarter of 2012. Next week they plan to raise $800 million in general obligation bonds to finance various transportation projects, followed by another $750 million later this winter in long-term bonds to fund construction projects.

Although the state is drowning in debt, unfunded pension liabilities and unpaid bills, these debt offerings are very restrained compared to the last two years when it borrowed to make obligatory payments to its heavily underwater pension system.

The State Treasurer, Dan Rutherford, had opposed issuing debt to fund pension obligations and managed to raise the alarm among his former colleagues in the Illinois legislature about the dangers of endless borrowing. Rutherford’s actions may have reversed the momentum of Illinois’s debt issuance. He is certainly the first fiscal officer that I have heard of who threatened to call the rating agencies to slow his state’s bond issuance.

In another important step for the cash-strapped state, Illinois raised the personal income tax last year:

An income tax hike enacted in early 2011 that will raise $6.8 billion in new revenue annually helped ease the state’s cash flow and budget woes, but its unfunded pension obligations still pose a daunting challenge to efforts to stabilize its fiscal house. The state’s funded ratios were the lowest among states last year based on fiscal 2010 results.

The latest review based on fiscal 2011 figures shows Illinois’ unfunded [pension] liabilities rose to $82.9 billion for a funded ratio of 43.4% from $75.7 billion for a funded ratio of 45.4% in fiscal 2010.

The need to fund pension liabilities is crushing Illinois. Reform must be pretty radical to move the system to a more sustainable level of pension funding, but the state government seems to be dithering:

Pending pension reform legislation aimed at cutting the state’s longterm liabilities and improving the health of the pension systems is among the major issues facing Illinois lawmakers as they return to work this month. SB 512 was headed towards approval last spring before it stalled amid union opposition. The bill would protect the accrued benefits already earned by current employees

In his budget request for 2011, Governor Pat Quinn seemed to suggest that there was some hope of a federal guarantee of the state’s pension system, although a local member of Congress put the kibosh to that idea:

In the governor’s proposed budget, the options for “significant long-term improvements” in its five pension systems included “seeking a federal guarantee of the debt” as well as curtailing public employee retirement benefits, borrowing more and increasing annual state pension contributions were identified as other choices. U.S. Rep Peter Roskam from Illinois said that there was no chance of the federal bailout of the state pension system.

The motto of Illinois is “State sovereignty, National Union,” but when it comes to the debt of fifth-most populous state, they are on their own. It’s highly unlikely that Congress or the Federal Reserve will step in to backstop the state, and the rating agencies and bond markets will soon start tightening the screws and raising the state’s borrowing costs, which would really hurt. There is really only one option: a messy fight to get public workers’ pension contributions and benefits to a sustainable level. The math suggests that is the only viable solution to Illinois’ fiscal woes. The legislature granted these benefits and they are the body that must modify them.

Illinois, you are muniland’s weakest player. Right your course before the bond vigilantes crack the whip.


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Gov. Pat Quinn on Tuesday issued an outline of his likely budget for the next fiscal year. It won’t be pretty.

Most state operations should expect a 9 percent reduction in the next budget, Quinn warned, and “further and larger reductions are needed to stabilize Medicaid costs.”

The governor also said he still wants the General Assembly to approve his plan to pay off old state bills by borrowing up to $7 billion.

The information is contained in an economic and fiscal policy report that must be filed annually by Quinn’s budget office under recently enacted laws designed to improve the state’s budgeting process.

The report is not the detailed budget proposal that Quinn will present to lawmakers in March. However, it does give an outline of what to expect when Quinn makes his budget presentation.

“We’re in a squeeze,” said David Vaught, Quinn’s budget director. “The pension costs and the Medicaid costs are going up more than the rate of inflation and more than the revenue growth. That squeezes everything else out.”

Consequently, Vaught said, other areas of government have to look at 9 percent reductions to compensate.

The State Journal Register

http://www.sj-r.com/archive/x352570250/S tate-budget-preview-projects-dismal-pict ure

Posted by Cate_Long | Report as abusive

Illinois, unable to solve its long-running financial problems, was given the lowest credit rating of any state in the country by Moody’s Investors Service on Friday, a move that will increase costs to taxpayers.

A second agency, Standard & Poor’s, left its Illinois rating unchanged but warned of a negative outlook that could lead to a downgrade in the future. A day earlier, Fitch Ratings also left the rating unchanged and declared a stable outlook.

http://www.carmitimes.com/topstories/x73 5288079/Moodys-lowers-Illinois-credit-ra ting-again

Posted by Cate Long | Report as abusive

This coming Wednesday (1/11), Illinois will sell competitive loans total $800mln next week ($525mln tax-exempt and $275mln taxable), a sizeable portion of an estimated $3.9bln in muni supply scheduled for sale.

Several market participants have asked us how Illinois General Obligation (GO) bonds trade. The following illustrates spread levels for the weakest trading state GO bonds versus MMD’s 10yr AAA GO spot rate:

Puerto Rico +233bps
IL +160bps
CA +75bps

What a difference a year makes. Last January (1/26 to be precise) we asked MMD subscribers to consider the “cheapness” of 5yr Illinois GO bonds which were +240bps over comparable AAA GO 5yr bonds. At that time, 10yr IL GOs were +223bps to MMD’s 10yr AAA GO spot rate.

When marketing this sale, analysts will take a closer look at Illinois’s lingering credit weaknesses. Now that 10yr Illinois GO bonds have a spread of +160bps we think MMD subscribers should remember that this spread has averaged +176.5bps for the past year. We now believe that this spread will revert to this level in view of the state’s prominent role in this week’s calendar.

Posted by munimarketmaven | Report as abusive

MMD believes that current 10yr IL GO spreads +160bps to AAA GOs will move to the 12mnth average of 176.5bps this week.

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