*** UPDATED x1 *** Going to market
Tuesday, Apr 2, 2013 - Posted by Rich Miller
*** UPDATE *** Despite all the hoopla during the past few months, Illinois got a pretty good price. From a press release…
The winning bid for the $450 million Series 2013 A tax-exempt bonds went to Bank of America Merrill Lynch with a bid of 3.92%. This bid is 68-to-145 basis points over the corresponding AAA-rated municipal index. This rate matches the 20-year-low rate of 3.92% that Illinois received on a $525 million in tax-exempt bonds in its last competitive sale January 11, 2012.
The winning bid for the $350 million Series 2013 B taxable bonds also went to Bank of America Merrill Lynch with a bid of 4.97%. This bid is 97-to-245 basis points over the corresponding U.S. Treasury rates. This is better than the 5.29% rate the Illinois received on its last offering of $275 million of taxable bonds, also on January 11, 2012.
Nine banks submitted bids on each offering Tuesday.
“While we are gratified by the attractive low all-in costs, the state continues to pay a significant penalty for its failure to address the shortfall in its pensions,” Illinois Director of Capital Markets John Sinsheimer said.
“Gov. Quinn has warned the General Assembly on many occasions that investors have told us we need to rein in our pension costs and that until we do, they would command a higher price for Illinois’ bonds,” Sinsheimer said. “Today’s rate is a direct result of the General Assembly’s failure so far to pass a pension reform bill. The good news is that members of the general assembly appear to be moving in that direction, passing several promising component bills in March.
“These bonds will help fund critical capital projects — roads, rails and schools — that might otherwise have to shut down. It will keep Illinoisans employed,” he said.
The state was advised by Public Resources Advisory Group with Mayer Brown and Burke, Burns and Pinelli as co-bond counsel.
[ *** End Of Update *** ]
* After a months-long delay, Illinois is about to sell a bunch of bonds…
With nearly $500 million in spring transportation projects planned, Illinois will sell $800 million of debt Tuesday with the hope that buyer demands for steeper interest rate penalties have softened after a two-month delay in the state’s first bond offering of the year.
The state will sell the general obligation bonds competitively through PARITY. Mayer Brown LLP and Burke Burns & Pinelli Ltd. are bond counsel and Public Resources Advisory Group is advising. Ahead of the sale, rating agencies affirmed the state’s ratings. The deal offers $450 million of tax-exempt paper and $350 million of taxable securities.
Proceeds will finance capital development, school building, and transportation projects included in the state’s ongoing $31 billion Illinois Jobs Now program. Gov. Pat Quinn announced $486 million in road and bridge projects last week. Capital fund coffers are running low. “Illinois has a world-class transportation system and we are making it even stronger by carrying out one of the largest spring construction programs ever,” Quinn said.
The deal comes after a series of downgrades due to the state’s massive unfunded pension obligations and bill backlog of up to $9 billion.
* And things are looking upbeat…
Buyers demand 1.3 percentage points of extra yield on 10-year debt from Illinois and its localities, close to the smallest since February 2011, data compiled by Bloomberg show.
That spread will be put to the test [today] when the state offers its first issue since Standard & Poor’s cut its rating to A-, six levels below AAA.
Friedland and Wendy Casetta at Wells Capital Management said the state’s 10-year general-obligations will probably price to yield about 1.5 percentage points more than AAA munis, about where they’re trading in the secondary market. Both said they would consider adding the debt.
“We don’t expect to see them go below A-,” said Casetta, who helps oversee $32 billion in munis for Wells Capital in Menomonee Falls, Wisconsin. “We’ve been big buyers of Illinois debt in the past, and we’ll continue to support the state, particularly now that they’re trying to do the right thing.”
Keep your fingers crossed, unless, of course, you’re one of those folks who’d like to see a major crash.
* Related…
* CTBA: The Illinois State Budgetand Tax Primer
* Wheeler: Legislature should work smart, not just hard, on the pension fix
* Downstate schools shorted in state funding, senators say
* Illinois seeking to hire more tax fraud investigators
* Bob Williams: Boeing serves as pension example for Illinois lawmakers
* Editorial: Fire insurance tax warrants review at state level
- Quiet Sage - Tuesday, Apr 2, 13 @ 11:36 am:
Charlie Wheeler’s article, linked to above, absolutely nails the issues involved in the pension fight. Probably the best article on the subject written yet. As Wheeler convincingly argues, the best way to solve the pension mess–an approach which, unlike those voted on so far in the House and Senate is clearly Constitutional–is to adjust the repayment schedule.
And Wheeler is totally on target as to the real reason this approach isn’t being considered:
“Granted, anything that doesn’t involve benefit cuts probably won’t satisfy the corporate moguls and their editorial page shills who seem motivated by a visceral loathing of public sector workers.”
- Rich Miller - Tuesday, Apr 2, 13 @ 11:37 am:
QS, the main reason why the fix isn’t being talked about much is that it would increase state costs by $1.8 billion next fiscal year. And Wheeler too easily dismisses those very high costs. Only if everything else gets knocked down will this be considered.
- Quiet Sage - Tuesday, Apr 2, 13 @ 11:57 am:
Couldn’t a big chunk of the $1.8 billion be financed by increasing employee contributions (as per Rep. Lang)? Based on the figures Wheeler presents, the increase would only need to be temporary. Actually Lang’s proposal, too, is Constitutionally dubious but stands on much firmer Constitutional grounds compared to the others and is probably unlikely to be challenged.
- wordslinger - Tuesday, Apr 2, 13 @ 12:06 pm:
–“We don’t expect to see them go below A-,” said Casetta, who helps oversee $32 billion in munis for Wells Capital in Menomonee Falls, Wisconsin. “We’ve been big buyers of Illinois debt in the past, and we’ll continue to support the state, particularly now that they’re trying to do the right thing.”–
Pay no attention to that investor, someone with real money in the game!
Just read the Tribbie edit board and listen to the wails of GOP lawmakers. We’re all doomed, remember?
- Kasich Walker, Jr. - Tuesday, Apr 2, 13 @ 12:42 pm:
http://illinois.municipalbonds.com/bonds/issue/452151LF8
Spend a minimum of about $5k or more to get 5.1% for 30 years. Try to get that rate at the corner bank, big or little.
- wordslinger - Tuesday, Apr 2, 13 @ 1:03 pm:
Lowest borrowing rates ever.
Sigh.
Tell me again why its irresponsible to pay some late bills to stressed vendors by issuing bonds backed by the portion of the income tax increase dedicated for that purpose?
- thechampaignlife - Tuesday, Apr 2, 13 @ 1:40 pm:
I picked up a 10 year IHDA tax-exempt bond on the secondary market two months ago at 3.714% yield to call (4.187% to maturity). So 3.92% on a 10 year tax-exempt bond is about a 6% premium over what I paid, no doubt because it’s new issue (avoid middleman premium I had to pay for a secondary) and it’s at larger volume than the $5000 I could afford so they can command a greater premium.
On the pensions, if Martire’s plan could be modified to an inflation-adjusted payment, it’d be the equivalent of a fixed $5.9B payment in today’s dollars. That’s much more feasible IMO and could still accomodate new revenues such as gaming, marijuana, service tax, retirement income tax, cost shift, or employee contributions to accomplish a fully constitutional solution.
One other thing I’ll point out related to the retirement income tax that I just recently discovered is that Illinois already taxes Roth contributions so taxing non-Roth as well will just make it fair and consistent. In fact, due to our current cash needs and the desire to capture the revenue before the person retires and moves out of state (to avoid the tax or just out of preference, taking their tax dollars and economic activity with them), I’d suggest taxing traditional accounts at the time of contribution like a Roth and not the time of withdrawal.
- phocion - Tuesday, Apr 2, 13 @ 2:43 pm:
Rich,
While we’d like to be cheerleaders, the bond sale wasn’t quite the rosy scenario painted in the articles you posted. The link below is a Bloomberg article that notes (1) Illinois bonds are still fetching a much higher price than California bonds; (2) the market is rewarding California because it is perceived as doing something about its budget woes, while Illinois continues to flounder; (3) if Illinois had just sold the bonds in January, they would have gotten a better deal because of seasonal weakening of the bond market.
http://www.bloomberg.com/news/2013-04-02/illinois-begins-first-bond-sale-as-worst-rated-u-s-state.html
- PublicServant - Tuesday, Apr 2, 13 @ 2:49 pm:
Phocion, Krugman has an excellent article in the NY-times regarding why California is now able to make progress…
http://www.nytimes.com/2013/04/01/opinion/krugman-lessons-from-a-comeback.html?partner=rssnyt&emc=rss
- phocion - Tuesday, Apr 2, 13 @ 3:01 pm:
Thanks, PublicServant. But Krugman fails to mention that Brown and legislative Democrats imposed serious cuts on social programs, along with tax increases. Really only that combination has lead to California’s fiscal salvation. But that fact would interfere with Krugman’s narrative.
- archimedes - Tuesday, Apr 2, 13 @ 3:02 pm:
“Thechampaignlife” has a point. An annual payment that increases by 2.5% per year would be $5.4 billion next year to pay off $85 billion over 45 years. Add the $1.7B normal cost = $7.1B compared to the FY14 cost now of $6.83B. The annual increase would be less than 2.5% since the normal cost is going down each year - closer to a 1.8% cost increase each year compared to the current increase of 3% to 4% each year.
Plus, the current payment plan under the ramp goes up as the pension bonds are paid off (the law authorizing the POBs reduced the ramp cost by the annual debt service of the POBs - once that debt service is gone, the pension payment jumps up - in 2034 there is a 13% jump in pension payments as the bonds are paid off).
5 years from now, 2019, the payment would be $7.5B and under the current system the payment (per COGFA) is $8.06B - so this would be about $600 million less in 5 years than we are paying now under the pension ramp. 10 years (2024)from now, the payment would be $8.06B compared to $9.5 B now. 20 years (2034) from now the payment would be $9.6B compared to $14.1B now (2034 is when the payment shoots up since the POBs are paid off - using the reamortization there is no big increase and the debt service no longer needed for POBs can be used for other operating costs).
- Small Town Liberal - Tuesday, Apr 2, 13 @ 3:07 pm:
- imposed serious cuts on social programs, along with tax increases. -
The tax increases allowed most of those programs to be restored. I guess that interferes with your narrative.
- phocion - Tuesday, Apr 2, 13 @ 3:53 pm:
STL, rather than engage in ad hominem attacks, you may want to do some research. I stand by my assertion:
http://www.bloomberg.com/news/2013-02-20/california-a-high-revenue-low-services-state.html
- phocion - Tuesday, Apr 2, 13 @ 4:12 pm:
And another from CNN Money, entitled “Big Taxes = Big Spending Cuts = California Budget Surplus”
http://money.cnn.com/2013/02/07/news/economy/california-budget/index.html
- Anonymous - Tuesday, Apr 2, 13 @ 4:18 pm:
Re: Bob Williams piece on Illinois taking a lesson from Boeing, someone ought to tell him Illinois had already altered pensions benefits for new employees. Typical right wing drivel spouting off without the facts.
- Old and in the Way - Tuesday, Apr 2, 13 @ 5:52 pm:
I posted to another article already but will repeat here. Bob Williams is a hack for the Heritage Foundation and is not “non-partisan” as SJR contends. In fact he is a former Republican politician from Washington state connected to ALEC and the Koch Brothers. Those in Washington state would find his comments re Boeing laughable. The State Journal Register needs to start checking these guest experts out. What a sham! Sock puppet!
- Ruby - Tuesday, Apr 2, 13 @ 8:26 pm:
There is an optimism in US financial markets driven by record breaking stock market prices. Illinois should benefit from stock market profits with an increase in tax revenue and higher investment returns for state pension funds. Illinois bonds are now looking like a safer investment. Another good year for state pension investment returns would help the state’s financial outlook more than anything the lawmakers are likely to do in Springfield.
- Arthur Andersen - Tuesday, Apr 2, 13 @ 9:23 pm:
Always good to see Ty Fahner’s law firm get a piece of the bond deal. #hypocrite
- Hyperbolic Chamber - Wednesday, Apr 3, 13 @ 9:46 am:
To put the 3.92% interest rate in context, in the first two years of the IL FIRST capital program IL sold more than $2.5 billion in bonds. In FY 2000, the average interest rate was 5.68% (30% higher than this year’s). In FY 2001 it was 5.03% (22% higher).