Illinois plans $1 billion spring sale on upgrade headwinds

Illinois plans to hit the market with at least $1 billion of general obligation paper before fiscal 2022 ends June 30, the first deal to benefit from the state’s latest rating upgrade.

The state “intends to sell general obligation bonds prior to June 30, 2022, to support the upcoming construction season, to continue the pension-buyout program and potentially to refund currently callable bonds depending on market conditions and the opportunity for savings,” the Governor’s Office of Management and Budget said in a statement Friday.

“While the exact size and timing of the bond sale are still being determined, the new-money portion of the bond sale is estimated to be approximately $1 billion,” the statement from spokeswoman Carole Knowles said.

Citigroup Global Markets Inc. and Siebert Williams Shank & Co. are joint senior managers. PFM Financial Advisors, LLC and Sycamore Advisors will serve as Municipal Advisors, and Chapman and Cutler LLP and Sanchez Daniels & Hoffman will serve as co-bond counsel.

The state will grapple with rockier market conditions and rising interest rates since its last GO sale in early December that saw the narrowest spread penalties in more than decade. That deal benefitted from a combination of the state’s improving budget picture, rating upgrades, and a market rich with buyers and strong interest for any incremental yield.

The 10-year maturity in the $400 million competitive sale landed at a 54 basis point spread to Refinitiv MMD’s AAA benchmark. It’s currently evaluated at a 119 basis-point spread and MMD has Illinois’ 10-year spread at 123 basis points and its 25-year at 130 basis points. The December results marked a 66 basis-point improvement from a March 2021 sale and a 214 basis-point improvement from the state’s October 2020 issue.

With rates on the rise and spread penalties hitting lower-rated credits the hardest, any ratings improvement would provide headwinds. Moody’s lifted the state’s rating April 21 to Baa1 from Baa2 and assigned a stable outlook.

The market anticipates further positive actions from Fitch Ratings and S&P Global Ratings after passage of a fiscal 2023 budget and supplemental 2022 budget that makes a dent in several of the state’s fiscal trouble spots by tapping rising revenues to pay down bills, build up reserves, and supplement scheduled pension contributions. Gov. J.B. Pritzker signed the budget April 19.

Fitch rates the state at BBB-minus and S&P Global Ratings has it at BBB. Both assign a positive outlook.

Moody’s recent action marked the state’s third upgrade after more than a decade of credit deterioration that left the state at one notch away from junk status. Moody’s upgraded the state last June and S&P followed in July.

Fitch left the rating at BBB-minus last year but moved the outlook to positive from negative and has signaled the potential for a multi-notch upgrade after it reviews the fiscal 2023 budget

While many market participants anticipate further upgrades in the coming weeks, the state’s ability to return to the A category poses a tougher challenge should an economic downturn erode revenues as the state exhausts its $8 billion of federal relief. Illinois’ $139.9 billion pension tab also weighs heavily on the ratings. Illinois is the lowest-rated state with most others rated in the double- to triple-A categories.

New money from the sale will fund capital work including projects laid out in the state’s ongoing $45 billion capital program and the pension buyout program.

Lawmakers approved and Pritzker approved House Bill 4292 that extends for two years existing programs begun in 2018 to June 30, 2024 and authorizes an additional $1 billion of bonding authority. The buyouts had been funded by $1 billion of GO authority, $175 million of which was tapped in the state’s last bond sale last December. Only $115 million of authority remains from that authorization.

Ilinois’ pension system is made up of five funds with the buyout programs limited to the three largest. The funds have begun to see an impact, albeit a modest one. As of the end of fiscal 2021, a $1 billion decrease in the liability came from all the Big 3 systems, according to a report published earlier this year.

The program offers members in the Tier 1 and Tier 2 group of beneficiaries — newer employees participate in a Tier 3 benefit structure — who no longer work for the state a lump sum payout equal to 60% of the present value of their vested pension benefit to leave the system.

The second offer goes to only Tier 1 members who are still employed by the state and have the option of receiving a lump sum benefit when they retire plus an ongoing annual payment, but at a 1.5% non-compounded cost of living adjustment instead of the compounded 3% COLA they are currently set to receive.