Illinois will return to market with a $1.4 billion GO deal

Illinois will return to market with about $1.4 billion of general obligation bonds next week, with proceeds funding accelerated pension benefit payments, Rebuild Illinois capital expenditures, information technology projects and other capital projects.

Like the rest of the state's outstanding debt, the bonds are fixed rate.

Illinois had $26.1 billion of bonded GO debt outstanding as of March 1, 2026.

"Illinois regularly accesses the municipal bond market to finance both the accelerated pension benefit payment program and long-term infrastructure needs," a governor's spokesperson said in an emailed statement. "As with any bond issuance, the state will evaluate market conditions at the time of pricing to determine next steps."

The lead managers on the deal are Loop Capital and Morgan Stanley (MS). PFM is the municipal advisor, and co-bond counsel are Chapman and HLF.

Final pricing is expected Wednesday after a retail order period Tuesday, according to the online investor presentation for the deal.

The $200 million of taxable Series 2026A bonds have a make-whole call. The $75 million of tax-exempt Series 2026B bonds are non-callable. Those two series are expected to have final maturities in 2026, according to the presentation.

The $1.125 billion of tax-exempt Series 2026C bonds, which mature through 2051, are callable at par at a date to be determined, according to the presentation.

The presentation notes that Illinois ? less than a decade removed from a political impasse that left it without a state budget for two years as unpaid bills piled up ? has achieved a record budget stabilization fund balance of $2.44 billion as of March 1 that is expected to grow to nearly $2.7 billion by the end of fiscal year 2027.

The state has a pension funded ratio of 47.4%, according to the FY2025 financial reports of the retirement systems. There's been a "positive shift in (the) pension beneficiaries population as active Tier 2 membership grows to outnumber active Tier 1," according to the investor presentation.

The 2026 bonds are rated A2 with a stable outlook by Moody's Ratings. Fitch Ratings and S&P Global Ratings both assign A-minus ratings with stable outlooks. They are the lowest ratings of any state government, but still much improved from the BBB-minus level ratings the state carried as recently as 2021.

Moody's said its A2 rating, the same as the state's issuer rating, reflects the state's broad revenue base and continued improvement in its financial metrics, but also Illinois' high leverage, limited operating flexibility and below-average economic performance.

"Illinois remains an outlier among states for exposure to unfunded pension obligations that contribute to high leverage and fixed costs," Moody's said in its rating report. "Though Illinois' fund balance and budget reserves continue to reach historic highs, they also remain lean as a share of revenue compared to those of other states."

Moody's expects the state's economy to continue to grow at a slower pace than most states due to its declining population trend.

But the rating agency said its stable outlook reflects an expectation that the state will hold onto its improved reserves and keep reducing its leverage.

Fitch also cited Illinois' elevated long-term liabilities, as well as its history of structural budgetary imbalance.

It said it could downgrade the state if it sees a return to old patterns of "irresolute and contentious fiscal decision-making," including delayed budgets with deeper pension funding deferrals, or budget management that incorporates major new recurring spending without offsetting it.

The rating agency said it could upgrade the state if it sees improvements in fiscal resilience or progress toward structural balance, including by narrowing the gap between actual and actuarially determined pension contributions.

S&P highlighted pensions in its analysis. "We view Illinois' governance factors as a moderately negative consideration in our credit rating analysis, given constitutional limits that constrain the state's legal flexibility to modify or implement pension benefit reforms and a funding framework that leads to significant underfunding," the rating agency said in its rating report.

But it also praised Illinois, saying the stable outlook reflects "much-improved budgetary flexibility," and Illinois now has "an adequately sized" budget stabilization fund with additional unrestricted general fund cash, having eliminated the short-term liabilities on its books from the recent past.

In response to a question about the governor's proposal to raise its long-term pension funding goal, the governor's spokesperson said, "The Governor's office is continuing to have conversations with the members of the General Assembly to move his path to full pension funding ahead in this Spring's legislative session."