CHICAGO — Illinois is gearing up to issue $1 billion of new-money debt before the end of the year to support its $31 billion capital budget, deals that are taking shape amid a fiscal picture that is more stable than a year ago after an income tax increase but facing renewed headwinds.
The latest negative report o came Monday from the Civic Federation of Chicago, local government review group, warning that the state faces a $5 billion operating deficit by the end of fiscal 2012 even with limited spending increases and revenue from the income tax hike.
That figure includes a $4.6 billion accumulated shortfall from previous years and a $454 million gap between revenues and expenditures. The operating deficit rises by another $1.7 billion if Medicaid expenses that were pushed into the next fiscal year are counted in fiscal 2012 along with unpaid business tax refunds.
“While the budget process was somewhat improved this year, the Civic Federation cannot say the state of Illinois is better off,” said president Laurence Msall. “By the end of fiscal 2012, the state will have a payment backlog that could require over $8 billion in state money to pay off. The state’s finances have not been fixed.”
The report is the latest in a series this year from independent analysts, state agencies, and constitutional officers warning of ongoing fiscal pressures that are offsetting strides in reducing red ink through spending caps and a tax increase expected to generate $6.8 billion annually.
The tax hike helped narrow the spread on secondary market trading of state debt and on credit default swap rates. The federation in the summer of 2010 contended that Illinois paid $550 million more to borrow over the last year because of its deteriorating ratings.
After a lull in borrowing in recent months, officials anticipate taking competitive bids on $300 million of sales tax-backed Build Illinois bonds in October, said state debt manager John Sinsheimer. It will then competitively offer a new-money general obligation issue in November and a negotiated new-money GO issue in December. Total borrowing of about $1 billion is planned through December.
Officials anticipate selling between $2 billion to $3 billion in the current fiscal year, which ends June 30, and a similar amount next fiscal year.
“We will be issuing smaller issues more frequently to better size our issues to our cash needs,” Sinsheimer said. New-money issuance over the last two years tended to come in fewer and larger deals.
Illinois will craft finance teams from new pools of underwriters, financial advisors, and underwriters’ counsel established after a request for qualifications process over the summer. The state held a public drawing to set the rotation lists last week.
“We did a public drawing because it was the most fair and unbiased way to set the rotation lists. Every qualified firm could come in and witness it,” Sinsheimer said.
The debt manager has had to deal with some disgruntled bankers after the scoring in the RFQ process resulted in 25 firms making the book-runner list. To better ensure that most of the firms in the top pool would get a chance to lead a state sale, Sinsheimer asked firms in the book-runner list — from the bottom up — to move to the co-senior pool, until five agreed. The co-senior pool now has 12 firms. Another nine are in the co-manager pool.
First up in the book-runner rotation is joint bidder Samuel A. Ramirez & Co. and U.S. Bank. Next is Morgan Keegan & Co., followed by Key Banc Capital Markets, joint bidder Duncan Williams Inc. and Rice Financial Products, and Stifel Nicolaus & Co.
Some bankers at larger firms privately questioned whether Illinois could capture the best interest rates with some of its smaller competitors at the helm. Sinsheimer dismissed those concerns.
“All the firms have the capital to run the books on at least a $400 million deal,” he said. “The state wanted to make this list expansive and that’s what we did. We believe that the banks on the list are fully capable of acting as a book-runner or they wouldn’t be on the list. The state’s financing needs are fairly simple and straightforward.”
Illinois retains the option of moving to the next firm on the list if it feels a firm lacks the capacity to lead a larger sale, and it can conduct a new RFQ for any specialty financings. The skipped-over firm would remain next in the rotation. A larger-than-usual number of firms qualified for the top spot due to the number of points awarded on questions related to state refundings and recommendations on swaps.
A total of 34 law firms submitted proposals for underwriters’ counsel, with the state qualifying 24, including two joint bids. The state qualified six financial advisors and selected one law firm, Mayer Brown, as bond counsel.
After a series of downgrades, Illinois’ GOs are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.
The Civic Federation analysis, conducted by its Illinois Fiscal Sustainability project, warned that the state is on pace to close out the fiscal year with $5.5 billion of unpaid bills. Due to increased borrowing over the last two years to cover pension payments and fund capital projects, the state’s debt burden has risen to $30.2 billion, a 222.1% increase since fiscal 2002 and a 44 % increase since fiscal 2009.
A recent special report from Moody’s noted that the state’s total liabilities including debt, unfunded pension liabilities, its structural deficit, and overdue bills totals $120 billion.
Gov. Pat Quinn’s office defended his efforts to address the state’s fiscal challenges and called for legislative action.
“Further reforms are still needed, including further pension reform and Medicaid reform, in order to prevent these costs from squeezing out every dollar that is needed for the critical services our state provides,” said Quinn spokeswoman Kelly Kraft.
