CHICAGO — Illinois plans to publish the offering statement on its long-planned $1.5 billion unemployment insurance bond issue the week of July 2, ahead of a pricing date set for the week of July 16, state capital markets director John Sinsheimer said Friday.
The Illinois Department of Employment Security will serve as issuer for the unemployment insurance fund building-receipts revenue bonds. They will sell in three series on July 18: for $777.9 million, $542.7 million and $172. 4 million. The state will use proceeds to repay loans owed by the unemployment insurance program.
“We have not yet decided whether to hold a retail order period,” Sinsheimer said of the transaction that was modeled after the Texas Workforce Commission’s $1.7 billion 2010 sale.
Fitch Ratings has assigned an AA-plus rating and stable outlook to the credit. Other ratings were not published as of Friday.
Bank of America Merrill Lynch, Citi, JPMorgan and Loop Capital Markets LLC will serve as co-book-runners. Acacia Financial Group Inc. will advise the state. Mayer Brown LLP and Pugh Jones & Johnson PC are bond counsel. Winston & Strawn LLP and the Tyson Law Group are underwriters’ counsel.
The bonds will be secured by a first lien on a portion of state employer contributions to the unemployment insurance trust fund. The bonds have a conservative structure with rapid amortization that also allows excess collections to go toward an early redemption. Additional borrowing is limited a 1.5 times revenue test and requires that at least 75% of the upcoming issue be retired first.
The pledged revenues are held in a separate and distinct account from various state funds and benefit from an irrevocable and continuing appropriation of receipts. Illinois has a collection rate of unemployment taxes from employers of 98%.
The rating “reflects the healthy debt-service coverage provided by a pledged portion of required unemployment insurance payments…sound legal provisions, and a conservative debt structure that accelerates debt retirement with excess collections,” Fitch wrote.
The fund building rate charted to employers generated $295 million in 2011 and, with enacted adjustments to the rate and wage base, is expected to raise $363 million this year.
The General Assembly approved the issue late last year. Its supporters contend it’s the most affordable means of restoring the trust fund — which is tapped to cover unemployment benefits — to solvency by lowering borrowing costs.
The legislation also included business perks to promote job creation. Federal loans that supported the trust fund were previously interest-free due to a stimulus act provision, but that ended early last year and the state now faces an interest rate payment of more than 4%.
The legislation paving the way for the issuance to repay the federal government is expected to save $240 million in interest. It leaves existing benefits intact and staves off increased business taxes. During its marketing campaign Illinois will likely stress the lack of ties between the unemployment fund borrowing and its own struggling credit, pressured by overdue bills and mounting pension obligations.
The state was poised Friday to close out the final business day of fiscal 2012 with about $3.9 billion in unpaid general fund bills. State Comptroller Judy Baar Topinka’s office was holding more than 163,000 in unpaid general fund vouchers as of Friday.
The $3.9 billion does not take into account other outstanding obligations that will be added as the state closes the books on the fiscal year. They include debts tied to tax refunds, Medicaid and employee health care. When those additional obligations are counted, the total is estimated at about $8 billion, according to Topinka spokesman Bradley Hahn. The number could grow as high as $9 billion by the Aug. 31 deadline for submitting prior year bills.
The comptroller’s estimates include $3.95 billion in unpaid bills, $2 billion in Medicaid payments, $1.1 billion for employee health insurance, $500 million for corporate tax refunds, $200,000 in state agency bills and $100,000 owed to non-general fund accounts. Another $600 million to $1 billion in vouchers are expected to come in by the end of August.
The $33.7 billion fiscal 2013 general fund budget Gov. Pat Quinn plans to sign Saturday earmarks $1.3 billion to help bring down the bill backlog.
“If the state does not implement meaningful changes to further align revenue and spending and address its accumulated deficit for fiscal 2013, we could lower the rating this year,” Standard & Poor’s has warned. S&P rates Illinois A-plus with a negative outlook.
In the state’s favor, lawmakers enacted a sweeping Medicaid reduction plan before adjourning in May but failed to act on pensions. Quinn and legislative leaders have been meeting in an attempt to reach agreement on a package.
Moody’s Investors Service rates Illinois’ general obligation debt A2 with a stable outlook. Fitch Ratings assigns an A and a stable outlook.
