Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=214851
Story Retrieval Date: 9/30/2014 6:56:41 PM CST

Top Stories
Features

$500 million bond offering canceled amid credit market worries

by Tanya Basu
Jan 30, 2013


Illinois' troubled financial history

It hasn't been a happy new year for Illinois' fiscal situation.

 

Nov. 2012: Illinois releases FY2012 numbers that show nearly $100 billion in unfunded pension liability.

Jan. 3 – Jan 8: 97th General Assembly Session fails to reach deal on pension reform

Jan. 24: Fitch rates Illinois GO bonds as A

Jan. 25: Moody’s assigns Illinois a rating of A2 – the lowest in the nation

Jan. 25: S&P reduces Illinois’ rating from “A” to “A-“ and presents a negative outlook for Illinois’ fiscal future.

Jan. 30: Bonds sale cancelled due to an “unsettled” market.


The state of Illinois called off a planned $500 million bond sale Wednesday, citing an “unsettled” market. The cancellation comes in the wake of Standard & Poor’s recent downgrading of the state’s credit rating.

“Our conversations with potential bidders lead us to believe the market is unsettled because of recent actions and comments by the bond rating agencies,” Abdon Pallasch, assistant budget director in the Governor’s Office of Management and Budget, said in a statement.

“We plan to schedule a new bond sale after the markets have had time to digest the news.”

Gov. Pat Quinn echoed these sentiments during an appearance Wednesday at the U.S. Green Building Council Awards Ceremony at the Shedd Aquarium. The cancellation was “one more alarm bell that we need to have our General Assembly listen to with respect to getting pension reform,” Quinn said.

Officials had hoped that selling bonds would raise funds and help ease the state’s dismal financial situation. Instead, potential bidders got “cold feet” and led the state to cancel the sale, said David Merriman, an economist at the University of Illinois’ Institute of Government and Public Affairs.

S&P downgraded the state’s credit rating Jan. 25 from single A to single A minus, mirroring low ratings from Moody’s and Fitch. Single A minus is one step above “junk bond” status.

S&P downgraded the state’s rating after a lame duck legislative session held in early January saw no resolution to the pension jumble. At the time, S&P issued a statement saying the single A minus status “reflects what we view as the state’s weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions.”

The only other state that has a single A minus rating is California. Unlike Illinois, California has a positive outlook.

The common type of bond used to raise revenue is the general obligation bond, or GO bond, which allows the government to use its own coffers from tax revenues and other sources to repay bond holders.

Issuing GO bonds to raise revenue is a standard practice among state governments and is normally considered a safe investment. But Illinois’ financial problems have marred potential sales.

Cancelling a bonds sale sends grave signals to the market and country about Illinois’ dire fiscal future, according to financial experts.

“It sends a terrible signal to potential lenders, residents and businesses that the fiscal situation is out of control,” Merriman said. “It is bad for Illinois’ reputation, and I worry that it will affect business investment and residents’ decision to continue living here.”

Steven Stanek, research fellow at the Chicago's Heartland Institute, a libertarian think tank, agreed.

“People are unsettled. And they should be unsettled. Illinois is a fiscal disaster. Illinois is the Greece of the United States.”

In addition to the state’s dire pension situation, Illinois faces another income tax increase in 2015 and rising health-care costs for an aging Baby Boomer population.

Fiscal reform won’t be easy.

“It’s a challenging path – it’s billions of dollars. Bond indebtedness has more than tripled in the last 10 years,” Merriman said. "The state has borrowed more than $10billion.”

Still, Merriman believes that bonds have to be part of the solution.

“We need a combination of tax increases and spending cuts and a long term plan. Once that is set in place, the bond markets will have no problem,” he said.

Stanek, on the other hand, is not sure bonds will solve a decades-old problem.

“The state has to commit to spending less money,” he said. “The solution to borrowing too much is not borrowing more.”

No date has been set for a future bonds sale, though Gov. Quinn is cautiously optimistic of a new date in the coming weeks.

“We will issue those bonds, but we’re going to have a cloud continue to hover over our state’s debt issuance until we get this pension reform accomplished,” Quinn said. “The time for reciting the difficulty is over. Now is the time for action.”