Illinois will sell up to $1.1 billion of general obligation refunding bonds and $600 million of taxable and tax-exempt new money GO bonds by Sept. 30.
The refunding bonds will price next week in a negotiated transaction, according to an
Bloomberg News
The municipal advisor on the refunding deal is Columbia Capital Management. Co-senior managers are RBC Capital Markets, BofA Securities and Ramirez & Co. Co-bond counsel are Chapman and Cutler, LLP and the Hardwick Law Firm, LLC, according to the
Sycamore Advisors, LLC is municipal advisor on the competitive $600 million offering, according to the Aug. 26 EMMA posting. That offering will feature three new money bond series: $150 million of taxable bonds to make accelerated pension payments and two tax-exempt series of about $450 million to finance capital projects.
“These bonds will fund infrastructure projects across the state under Rebuild Illinois,” Jordan Abudayyeh, deputy chief of staff for communications for Gov. JB Pritzker, said of the latter bonds. “The vast majority of these projects are transportation-related improvements.”
The bonds will arrive with single-A-minus ratings, a far cry from the across the board triple-B-minus ratings Illinois carried
“The state has made tremendous progress,” Eric Kim, Fitch Ratings senior director and head of U.S. state ratings, told The Bond Buyer. “[But] there are some real challenges for Illinois on the liabilities side. They have improved their ability to withstand a downturn, but they’re still more vulnerable than we think most other states are.”
Fitch affirmed its A-minus Illinois GO and issuer rating ahead of the deal. It assigns a stable outlook.
The investor presentation says the Pritzker administration has made steady progress in putting the state on firmer financial footing since taking office in 2019. Bonded indebtedness dropped by $0.4 billion — to $27.6 billion from $28 billion — between fiscal year 2019 and FY2024.
The bill backlog, which stood at $8 billion in 2019 and had climbed as high as
The state has made supplemental pension contributions of $700 million since FY2022. It has deposited over $2 billion in the budget stabilization fund from 2022 to 2024, so that that reserve fund now contains $2.16 billion. The expected deposit of $198 million in FY2025 will bring the balance to $2.36 billion, or 4.9% of projected FY2025 revenues — closer to the new statutory target of 7.5% of revenues.
At the end of FY2024, the state’s general funds cash balance was nearly 9% of revenues. Its preliminary fiscal 2024 revenues of $45.265 billion surpassed forecasts, and its total resources for the year, including COVID-related federal receipts, came to $52.589 billion.
Fitch noted that Illinois’ economy is growing slowly, and its carrying costs are the highest of any state. Demands for state constitutionally-protected pension contributions “will continue to be a particular pressure point,” Fitch said, citing the large gaps in actual pension contributions relative to actuarially determined levels.
The carrying costs include annual debt service costs; annual pension costs on an actuarially determined basis; and the other post-employment benefits annual payment. Kim said that in any particular year, if Illinois’ carrying costs are not the largest, they’re the second or third largest of any state.
“Essentially, it means that they have less flexibility in managing their budget and adjusting spending than other states which have lower levels and therefore much higher proportions of their budget devoted to discretionary items,” he said.
The pension liability is “the larger challenge for them, by multiples,” Kim said. The state’s most recent audited financial statements, through fiscal 2022, show a debt liability of about $35 billion and an adjusted net pension liability of $161 billion, he said.
The state has been regularly issuing debt, but much of the issuance over the past few years has been refunding debt, Kim said. Still, Illinois’ debt burden ranked 41st out of all the states in a Fitch analysis published last year. The state’s pension liability was the worst, ranking 50th. Combined, Illinois ranked 49th among U.S. states.
Moody’s Ratings confirmed its A3 rating and positive outlook ahead of the deal.
Moody’s pointed to “steady improvement in financial metrics,” including an improved fund balance, but noted that those are counterbalanced by the state’s high leverage, slowing economic growth and weak demographic trends.
The positive outlook stems from the chance that “continued stability in state revenue and growth in fund balance and reserves will drive an improvement in the credit rating,” Moody’s said in its rating report. “Actions that shore up financial health could further mitigate exposure to high liabilities and fixed costs.”
S&P Global Ratings ahead of the deal affirmed its A-minus rating on the state’s GO debt; its BBB-plus rating on the state’s appropriation-backed debt; and its BBB-minus rating on the state’s moral obligation debt. The outlook is stable.
The A-minus rating reflects recent management actions that have boosted the state’s financial flexibility as well as the state’s strong economic base, historically strong liquidity, increased financial reporting transparency and declining GO debt schedule, S&P said.
Illinois’ slow-growth economic outlook and its pension liabilities remain a drag on its credit profile. S&P Director Scott Nees told The Bond Buyer S&P Global Market Intelligence forecast data show that, under the baseline scenario, Illinois’s real GDP growth rate over the next four quarters will rank 39th among all states. Its employment growth will rank 45th, and its growth in personal income will rank 32nd.
In commenting on “meaningful upside constraints that keep separating [Illinois] from more highly rated states,” including its pension liabilities, Nees noted Pritzker’s proposal in the last legislative session to raise the state’s pension funding target to 100% from 90% and to redirect funds from maturing debt to the state’s five pension funds beginning in early 2030.
“If this or a similar proposal were to move forward, we would evaluate its rating implications in light of an actuarial analysis detailing its impact on pension funding levels and contributions, and in the context of a rating committee,” he said. “Certainly raising the funding target to 100%, directing more money into the pension funds, and lowering liabilities would mark an improvement, but we expect the state’s contributions to still fall short of actuarial recommendations under such a scenario.”
Fitch likewise mentioned the governor’s proposed pension policy change in its rating report, saying: “Executive proposals to adjust pension contribution practices could help address these issues [the gap between actual and actuarially determined pension contributions and the long-term liability burden] if implemented successfully over approximately the next decade.”
“The governor outlined his pension proposal in the spring session and there was a bill introduced with the language to implement his proposal,” said Abudayyeh, the governor’s spokesperson. “While no action was taken in the spring, the governor continues to have conversations with leaders in the General Assembly and will continue to advocate for passing this proposal. As the credit ratings agencies pointed out, the governor’s proposal is fiscally responsible and will produce better fiscal results for Illinois in the years ahead.”
Fitch’s Kim said a significant growth in reserves could lead to further rating upgrades. The state has seen nine upgrades since 2021,
“Right now, the state is at about 5% in terms of the dedicated operating reserves, the budget stabilization fund,” he said. “Our view is that if they were to grow that materially closer to 10%, that could be supportive of upward rating movement.”
Kim noted that the type of revenue growth Illinois saw coming out of the pandemic is unlikely to repeat, so the state is probably not going to see the same significant increases in the budget stabilization fund as it did over the last few years.
Illinois has done a great deal to reduce its various budgetary liabilities, pay down obligations and position itself better to withstand the next downturn, he said. And the downturn will come eventually.
“Our ratings are intended to assess how well a state is positioned to deal with that downturn,” he said. “And Illinois’ position is considerably improved… That said, there’s still a ways to go.”