Illinois will take positive S&P rating outlook into GO deal

BY SourceMedia | MUNICIPAL | 11/18/21 03:06 PM EST By Yvette Shields

Illinois returns to the market Dec. 1 with a $400 million issue in the state?s first general obligation sale to benefit from a round of positive rating actions, the latest Thursday when S&P Global Ratings raised its outlook to positive.

The state tentatively plans to competitively sell $400 million in two tax-exempt series, each for $200 million.

Approximately $175 million will ?fund ongoing accelerated pension benefit buyout program and remaining proceeds after will be for capital purposes largely for Rebuild Illinois,? the state?s ongoing $45 billion capital program, Gov. J.B. Pritzker?s budget office announced Wednesday.

Public Resources Advisory Group is advising the state. Chapman and Cutler LLP and Hardwick Law Firm LLC are bond counsel and Chapman is also disclosure counsel.

Since Illinois? last GO issue in March, the state has reaped a series of rating rewards for its pandemic recovery bolstered by $8 billion in federal American Relief Plan Act funds and rebounding state tax revenues.

"The outlook change reflects our view of Illinois' continued improved transparency and budgetary performance," S&P analyst Geoff Buswick said Thursday.

Moody?s Investors Service and S&P raised its rating by one notch moving it two levels away from junk, in June to Baa2 and July to BBB, respectively. Fitch Ratings raised the outlook on its BBB-minus rating to positive from negative in June.

Moody?s affirmed the rating Wednesday and Fitch followed on Thursday before S&P offered even more welcome news.

Illinois last week published a five-year forecast that anticipates a $1.7 billion surplus this year that will allow the state to pay down $900 million in bills and to put $300 million into its depleted rainy day fund.

The positive outlook signals that there is at least a one-in-three chance that S&P could raise the rating within the two-year outlook period but it came with warning against backtracking.

"While pension-related fixed costs are likely to persist, if funding of the actuarially determined pension obligations does not continue to improve and the state's forecast budgetary outyear gaps do not meaningfully narrow, we could revise the outlook to stable," Buswick said. The forecast trims future gaps but they still range from $400 million to $1.1 billion.

The 10-year in the state?s March GO sale landed at a 152 basis point spread to the Municipal Market Data?s AAA benchmark and the long 25 year bond settled at a 110 bp spread. They are currently evaluated at spreads between 62 bps and 67 bps based on more recent trading. MMD sets the state?s 10 year at a 73 bp spread to the AAA and 16 bp spread to the BBB.

Illinois? first post upgrade deal in August, a $500 million issue sold under its higher rated sales-tax backed security known as Build Illinois, saw spreads sliced in half from the previous issue. The 10-year in one tranche landed at a 1.38% yield, a 45 basis point spread to the AAA compared to an 89 bp spread in the last Build Illinois sale in 2018.

Build Illinois carries BBB-plus ratings from Fitch and S&P with both ratings capped due to the credit's link to the state government despite strong coverage ratios. Kroll Bond Rating Agency, which doesn?t penalize the credit for the state link, rates it AA-plus.

The state enacted two pension buyout programs as part of the fiscal 2019 budget package with the aim of saving hundreds of millions. The state extended the buyouts through fiscal 2024 financed with bond proceeds.

After some initial bumps in implementing the programs, they moved forward but an assessment of the benefits on the unfunded liabilities and contribution requirements has been slow in coming.

The Teachers Retirement System, the largest of the five that make up the state?s pension system, said its newly released fiscal 2021 actuarial results ?revealed that since the 2019 inception of two benefit buyout programs, TRS members have collected $534 million in advance benefit payments, which has led to a $70 million reduction in the required state contribution in the new fiscal year.?

In fiscal 2020, a $5.2 million decrease came from SURS [state university employees] due to the impact of the buyout programs. TRS and SERS did not report any actuarial gains or losses, according to a July report from the Illinois Commission on Government Forecasting and Accountability.

The state?s most recent offering statements have said the buyout programs are expected to lower the unfunded tab but the impact can?t yet be quantified. The Chicago Civic Federation believes the early inability to assess the impact underscores the need for any future pension legislation to receive ?a full actuarial analysis ?in order to inform elected officials, participants and the general public of the potential impact of any pension changes.?

The programs cover three of the state?s five systems: teachers, general employees and university faculty. Under the programs, inactive fund members in the Tier 1 and Tier 2 benefit schemes can receive an accelerated payment and Tier 1 members can opt to receive an accelerated payment in exchange for receiving a smaller cost of living adjustment going forward.

The upcoming offering statement and a report due in early December from COGFA will provide an update on the programs based on fiscal 2021 pension results as well as unfunded liabilities and the state?s fiscal 2023 contributions.

The Teachers' Retirement System recently published its preliminary fiscal 2021 financial report showing its funded ratio moved up to 42.5% after holding steady around 40% for several years and its unfunded liabilities dropped slightly to $79.9 billion from $80.7 billion due in large part to stellar investment returns of 25.5% for fiscal 2021, according to Segal Consultants.

The state?s total fiscal 2020 tab was $141 billion. If the others show similar results to TRS the total figure would mark a reversal in the steady rise.

?While a small step, the improvement in the funded ratio is a positive move toward bringing stability to the system?s long-term finances,? TRS Executive Director Stan Rupnik said in a statement.

TRS preliminarily set the state?s fiscal 2023 contribution at $5.89 billion, a 4% increase from the $5.69 billion payment owed for the current fiscal 2022 based on the statutory formula aimed at reaching a 90% funded ratio in 2045. If the contribution was set a solely actuarially based formula, TRS estimates a $9.1 billion payment would be required.

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