Some “experts” confounded by latest bond sale
Wednesday, Oct 18, 2017 - Posted by Rich Miller
* Tribune…
Gov. Bruce Rauner’s administration borrowed $1.5 billion on the bond market Tuesday as part of a larger plan to whittle away at the state’s about $16 billion pile of unpaid bills and save money on interest costs.
The state received an overall interest rate of 3.5 percent on the bonds. That’s compared to as much as 12 percent per year in interest the state pays to contractors who have waited months to be compensated for their work because of Illinois’ cash crunch. The last time the state borrowed money, in November 2016, it received an interest rate of just less than 4.25 percent for $480 million in bonds.
* But…
* Still…
The loan carries an interest rate of 3.5 percent — remarkable given Illinois experts expected the state’s poor credit to drive interest as high as 6.5 percent. But, more importantly, it’s far lower than taxpayers have to fork over in late-payment fees.
Maybe don’t consult those “experts” any more if they’re so bad at predictions?
* Deets from the governor’s office…
· $500 million of general obligation bonds, series of November 2017A were awarded to Bank of America Merrill Lynch with a true interest cost of 1.67 percent for the one-year maturity.
· $500 million of general obligation bonds, series of November 2017B were awarded to J.P. Morgan Securities LLC with a true interest cost of 1.75 percent for the two-year maturity.
· $500 million of general obligation bonds, Series of November 2017C were awarded to Bank of America Merrill Lynch with a true interest cost of 3.95 percent for the 12-year maturity.
* For the bond geeks…
* From the Illinois Policy Institute’s news service…
Illinois paid a penalty for its poor governing decisions when it made its first bond offering Tuesday to pay off part of its bill back-load.
The state will pay 3.5 percent on the $1.5 billion in debt that it issued Tuesday. The state will offer up more debt in the coming days, totaling $6 billion in bonds to pay down some high-interest bills accrued in the budget impasse. The state’s backlog of bills had ballooned to $16 billion.
While analysts said the rate was lower than they expected, a fiscally sound state would have paid a little more than two percent for a similar loan, according to Municipal Market Data. More bonds are expected to be sold next week.
* Comptroller Mendoza made a good point…
The 3.5 percent rate the state of Illinois received on its competitive bond offering Tuesday will serve state taxpayers much better than the interest rates of up to 12 percent the state pays on parts of its bill backlog now. Once the negotiated sale is complete, my office will leverage federal matching funds to get taxpayers a good return on their investment and we will move swiftly to pay down the highest-interest-accruing parts of the state’s debt.
* Back to the Trib…
The state’s nearly $16 billion backlog of bills is triple the amount when Rauner took office in January 2015. Though the state went two years without a budget amid fighting between the Republican governor and Democrats who control the legislature, government continued to spend money and rack up debt. A series of laws, one-time agreements and court orders meant money kept going out the door. And the Rauner administration continued to sign contracts, whether or not the money was there to pay for them.
Under state law, unpaid bills can accrue from 9 percent to 12 percent interest a year. The bipartisan Commission on Government Forecasting and Accountability has estimated that could cost the state as much as $2 million a day.
* And back to the governor’s office…
“The state received strong bids today for its bonds and is pleased with the market’s favorable reception of the sale,” said Scott Harry, director of the Governor’s Office of Management and Budget. “This bodes well for the state’s financing coming next week.”
Following the completion of next week’s $4.5 billion bonds to complete the backlog refinancing, the State will return to the capital markets later this year with a $750 million general obligation bond issue for 2018 capital projects, which will also be sold competitively.
* Related…
* Bond Buyer: First chunk of $6 billion in Illinois paper goes down easy: Illinois held spread penalties in check as enticing yields lured buyers to its $1.5 billion general obligation issue Tuesday.
- Anon - Wednesday, Oct 18, 17 @ 12:54 pm:
Like I’ve been say in the comments here on a regular basis, the credit rating for a state doesn’t matter in the bond pricing because for a general obligation bond from a state there is very little risk because the bond debt gets paid first.
And if for some reason there’s a default and the state doesn’t pay, courts can order the payment out of existing revenues, or even order tax increases to pay for it.
This deal basically demonstrates that the last bond sale we had was an issue where we were letting the bond underwriters royally ***** the people of Illinois and effectively agreed to transfer many millions of dollars from the People of Illinois to wealthy investors when we didn’t need to.
But at least someone involved in this round is aware of the ability to negotiate.
- Sonny - Wednesday, Oct 18, 17 @ 1:03 pm:
The Governor moved on this kicking and screaming. There still has been no explanation for his intransigence on something that should have been a no-brainer. The Comptroller called him out early and often and she deserves the credit she’s getting for saving the state a lot of money. A lot of electeds talk a good game but these are actual substantial results.
- thechampaignlife - Wednesday, Oct 18, 17 @ 1:03 pm:
I am curious, who pays the interest? Does that money come out of the appropriations to the state agency? If so, the decisions of how we prioritize repayment can have a significant impact on agencies through no fault of their own.
- A Jack - Wednesday, Oct 18, 17 @ 1:12 pm:
In comparison, U. S. 1 year T-bills were recently auctioned at near 1.4 % yield, so 1.67% seems very good considering Illinois’ credit rating.
- Perrid - Wednesday, Oct 18, 17 @ 1:14 pm:
@ thechampaignlife, I think it does come out of the agency’s budget, though I could be wrong. From the Prompt pay act:
“(30 ILCS 540/3-5)
Sec. 3-5. Budget Stabilization Fund; insufficient appropriation. If an agency incurs an interest liability under this Act that is ordinarily payable from the Budget Stabilization Fund, but the agency has insufficient appropriation authority from the Budget Stabilization Fund to make the interest payment at the time the interest payment is due, the agency is authorized to pay the interest from its available appropriations from the General Revenue Fund. (Source: P.A. 100-23, eff. 7-6-17.”
- Ahoy! - Wednesday, Oct 18, 17 @ 1:37 pm:
Whoever worked this should be commended, this specific item seems like pretty darn good management. Now we just need this about 4 or 5 more times.
- Publius - Wednesday, Oct 18, 17 @ 2:05 pm:
A Jack- that’s a 20% increase
- wordslinger - Wednesday, Oct 18, 17 @ 2:20 pm:
No IPI, Illinois finally made a wise, no-brainer, fiscally sound decision to refinance existing debt at a lower interest rate. Maybe if you all take off your shoes so you can count higher you’ll figure out the savings in real money.
The poor governing decisions were to pile on $12B in operating debt in less than three years for an alleged “reform” agenda that none of you whiz kids could project any ROI.
That was truly idiotic.
- Muniguy - Wednesday, Oct 18, 17 @ 2:35 pm:
@jack, the better benchmark for tax-exempt debt is the MMD “AAA” one year yield which is 0.94% as of this morning.
- Anonymous - Wednesday, Oct 18, 17 @ 2:53 pm:
Or maybe the better comparison is to the 12% the state has been paying on money unwillingly lent by vendors. About time.
- Accountant - Thursday, Oct 19, 17 @ 10:58 am:
The disturbing thing for me is that we waited this long to buy bonds while we accrued the 12% interest. Isn’t that just poor cash management? Is trying to prove a point at the cost of the taxpayers worth that??