Closure of $6 billion bond deal allows Illinois to begin paying down backlog

BY SourceMedia | MUNICIPAL | 11/08/17 07:22 PM EST By Yvette Shields

CHICAGO – The Illinois comptroller’s office received an infusion Wednesday of $6.48 billion of bond proceeds to cut down the state’s record $16.7 billion backlog of unpaid bills.

The state closed on its two recent bonds sales totaling $6 billion. The bonds sold at a premium price so they generated additional proceeds. Comptroller Susana Mendoza said about $2.5 billion will go immediately to cover unpaid medical bills with close to $4 billion being used to pay down unpaid state health insurance claims owed to medical providers.

The office will prioritize bills eligible for federal matching fund with the expectation that an additional $2 billion of the backlog can be paid off. The state pays interest rates of 9% to 12% on some of its bills. The all-in borrowing rate paid by the state on the 12-year general obligation bonds authorized in the fiscal 2018 budget package to pay down the backlog landed at 3.5%.

"These payments will effectively stop the bleeding of late payment interest penalties on this portion of the backlog. There is still a long, hard road ahead of us, but this is a vital first step toward smart planning for fiscal 2019 and beyond,” Mendoza said in a statement.

Also on Wednesday, the Senate overrode Gov. Bruce Rauner’s veto of the Debt Transparency Act in a 52-to-3 bipartisan vote. The House previously overrode the veto, so the act now becomes law.

The legislation expands what’s now an annual report on bills held by agencies to monthly reporting. Mendoza lobbied lawmakers for their support, arguing that more timely reporting was needed to improve cash and debt management that could improve state finances.

The backlog was driven up to a record level by the record two-year budget impasse that ended in July. Unpaid bills are a key factor in the state’s credit profile as they provides a picture of its cash and liquidity status. The state carries two ratings that are the lowest investment grade level.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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