Illinois to issue $1.8 billion of general obligation bonds

BY SourceMedia | MUNICIPAL | 05/06/24 10:31 AM EDT By Jennifer Shea

Illinois will issue $1.8 billion of general obligation bonds ? $250 million taxable Series 2024A and $1.55 billion tax-exempt Series 2024B ? to fund accelerated pension benefit payments and capital expenditures through the Rebuild Illinois program.

The fixed-rate bonds are expected to price this week.

Jefferies, Siebert Williams Shank and Barclays (JJCTF) are joint senior managers on the deal. Public Resources Advisory Group is municipal advisor. Chapman and Cutler LLP and McGaugh Law Group LLC are co-bond counsel.

The bonds are direct general obligations, backed by the state's full faith and credit. There is a continuing appropriation in place which guarantees bond repayment without the General Assembly needing to act.

Ahead of the deal, Moody's Ratings revised Illinois' outlook to positive from stable, citing ongoing improvement in the state's fund balance and budget reserves and stable revenue, among other things. It rates the state and the bonds A3.

Fitch upgraded Illinois' issuer default rating to A-minus with a stable outlook in November. It affirmed the rating and outlook before this week's deal.

Ahead of the deal, S&P Global Ratings affirmed its A-minus rating; the outlook is stable.

"The state's progress in improving its structural budget alignment, paying down liabilities, and building its budgetary reserves all place it on a positive credit trajectory, but the stable rating outlook continues to reflect our view that there remain meaningful upside constraints that keep it separate from more highly rated states," Scott Nees, an S&P director, said in a statement.

S&P noted Illinois' retirement liabilities and significant annual funding shortfall, as well as a Budget Stabilization fund that has improved substantially but "still only offers a comparatively thin bulwark against revenue decline."

In offering documents, the state said it has deposited $1.2 billion to the Budget Stabilization Fund in fiscal 2023 so that the fund is now at $1.9 billion. The state expects to deposit $205 million in fiscal 2024 and $170 million in fiscal 2025, bringing the balance to 5% of projected fiscal 2025 revenues, and close to the statutory target of 7.5%.

"The pension buyout program has been one of a few different actions the state has taken to reduce retirement liabilities, and it has had some effect, reducing liabilities by an estimated $2 billion to date," Nees told The Bond Buyer. "While not trivial, the budgetary and overall credit impact, however, is modest given that the state has pension liabilities totaling nearly $150 billion."

S&P said it could raise the state's rating if pension, other post-employment benefits and Budget Stabilization Fund funding levels keep improving, and if Illinois shrinks its structural deficit without seeing a decline in other credit factors.

"Although not required for us to consider an upgrade, a return to a more abbreviated audit-release period would be in line with that of higher-rated peers," S&P added.

Nees noted that the state's debt load is comparable to those of other states, notwithstanding its high overall costs, such as for debt and pension liabilities.

Fitch said that Illinois' operating performance, while "solid," still lags most other states, due in large part to structural imbalances tied to underfunding pension liabilities. Like S&P, the rating agency pointed to a slow economic growth trajectory, but Fitch said it predicts the state's broad revenue base, mostly from income and sales taxes, will "capture the breadth of its economy" over the long term.

Still, Fitch noted in a press release, "Carrying costs are higher than all other states and contribution demands for retiree benefits will continue to be a particular pressure point as these benefits are constitutionally protected."

Because of those constitutional protections, Fitch said, Illinois has little room to change its pension obligations. The state has made progress in lowering other post-employment benefit liabilities recently.

"Gaps in pension contributions relative to actuarially determined levels persist, with recent supplemental contributions helpful but insufficient to address this structural budget gap," Fitch added.

The state noted that it has all but wiped out its legacy bill backlog, cutting it by $16.1 billion or 97% since 2017. Its fiscal 2024 accounts payable total is projected to drop by 13% year-over-year.

The cash balance in its general fund has recovered from a drop in fiscal 2023 ? to $787 million from $1.143 billion ? and stands at $1.71 billion as of March 31.

Fiscal 2024's budget surplus is expected to reach $1.8 billion, while the fiscal 2025 surplus is projected to be $298 million.

Illinois in its investor presentation for the deal pointed to declining unemployment rates and a rising per capita income that roughly tracks trends nationally and in the Great Lakes region, with the state's 2023 figure, $70,953, coming in higher than both the national and regional data points.

The state currently has $26.4 billion of outstanding GO bonds. The new debt will bring that total to roughly $28.2 billion.

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