Thursday, April 10, 2014

Illinois sells $250 million in GO bonds to build schools, roads, bridges. Gets Lower Interest Rate Than Last Auction

From the Gov's Bureau of the Budget, April 10, 2014

Bank of America/Merrill Lynch made the winning bid of 4.08% (true interest cost) for $250 million in General Obligation State of Illinois bonds Wednesday. The money will be used to fund construction of roads, schools, bridges and other capital projects under the Illinois Jobs Now! infrastructure program.

The rate is the third-lowest secured by the state since Gov. Pat Quinn took office five years ago and compares to a rate of 4.46% the state obtained on its most recent $1 billion bond sale in February – before Gov. Quinn proposed his FY 2015 budget – and 5.05% on our $1.3 billion offer in June, prior to the state’s passage of comprehensive pension reform.

That means Illinois taxpayers will pay about $10 million less over the life of the bonds compared to the state’s costs under the most recent rate in February.

Part of the better rate can be explained by movement in the markets over the past few months, but much of the improvement also is owed to the market’s approval – as expressed in the bond rating agencies’ reviews over the past week – of Gov. Quinn’s proposed FY 2015 budget, which includes maintaining the current state tax rates to provide long-term stability and properly fund education, Illinois’ Director of Capital Markets John Sinsheimer said.

“The market has spoken today and clearly investors feel, as the ratings agency has said in recent days, that Gov. Quinn’s budget ‘provides a basis for the state to achieve fiscal balance,’” Acting Budget Director Jerry Stermer said. “The rating agencies also have noted the positive steps our administration and the General Assembly have made in passing a comprehensive pension reform bill and paying down the backlog of bills.”

Eight bidders made offers on the 25-year tax-exempt bonds Thursday.

In recent days the three major bond rating agencies have released the following assessments of Gov. Quinn’s proposed budget and Illinois’ financial health:

Standard & Poor’s:

“We believe that the not-recommended budget could weaken structural alignment for Illinois … The recommended budget could contribute to enhanced structural alignment due to less severe spending reductions needed to achieve balance…”

“Per-capita personal income in 2013 was $46,780, or 105% of the U.S. average, ranking the state 15th nationally and first among the Great Lakes states.”

“Structural budget alignment improved in fiscal 2013 and 2014 due to economic and revenue recovery, revenue enhancement, and spending restraint and reform. Illinois generated a surplus in fiscal 2013 and forecasts another for fiscal 2014, which has lowered the general fund deficit and payables outstanding on a budgetary basis. This reduction is positive, in our view…”

“We view the pension reform as a significant accomplishment that could lead to improved pension funding levels, greater pension plan sustainability, and improved prospects for budget stability. We consider the reform to be comprehensive, addressing a range of areas that we believe should significantly reduce liabilities.”

“A developing outlook indicates that we could raise, lower, or affirm the rating during the two-year outlook horizon. The outlook reflects our view of the consensus reached on pension reform, which we believe could contribute to a sustainable path to fiscal stability … If pension reform moves forward and Illinois takes credible action to achieve structural budget balance beginning in fiscal 2015, we believe a higher rating would be warranted.”