Illinois makes selling points for its newspaper ahead of a $700 million deal
Illinois basked in a better fiscal picture this week as it met with the buy-side than it did at its last event in 2019 when its ratings teetered on the brink of junk, but investors still worry about how the State would survive a possible recession and its prospects for further progress.
Illinois’ top financial executives held the in-person and online event to provide financial reviews and answer questions ahead of a competitive $700 million general commitment sale scheduled for Wednesday.
Proceeds from the sale will fund equity projects, with $140 million going towards the state’s ongoing pension purchase programs aimed at reducing underfunded liabilities. The state this year extended the deadline for the pension purchase program to 2026 and increased borrowing from $1 billion to $2 billion. With the upcoming sale, the state will have tapped $1.15 billion.
The deal comes amid the market mired in continued bond fund outflows and rising interest rates amid Federal Reserve measures aimed at curbing inflation. The state’s spreads, while still tight compared to the highs of 2017 and then the early days of the COVID-19 pandemic, widened 10 basis points to a spread of 133/139bp versus Municipal’s AAA benchmark Market data of 123/129 bps from mid last week.
In its favor, the state is hitting the market with a new round of spring upgrades. “We stand on the strongest financial footing in the state’s recent history,” Andy Manar, assistant governor for fiscal and economic affairs, told the 150 attendees, who included a mix of investors, bankers and other market professionals, at Wednesday’s meeting.
“We’ve been working really hard during this strong economic performance here over the last 18 months or so to really address some of the debt we inherited in 2019 and tried to make sure we’re saving for the future through permanent revenue streams and the Fiscal stabilization funds while also providing some tax relief,” said Office of Management and Budget Director Alexis Sturm, who presented with Manar and Capital Markets Director Paul Chatalis.
Like most states, Illinois’ tax revenues surged last year when it received its share of ARPA funding — about $8 billion — which the state used to make progress on several of its longstanding chronic wounds , including the settlement of a bill arrears, peaked in 2017 at nearly $17 billion.
The Barren Rainy Day Fund received a $1 billion infusion this year, and the state also injected another $500 million for its onerous $139.9 billion pension plan. The advances raised the sovereign’s ratings to BBB-plus from Fitch Ratings and S&P Global Rating and a corresponding Baa1 from Moody’s Investors Service. The latest upgrades have followed several over the past year, but it remains the lowest-rated condition.
The state is now two notches above its low reached during a two-year fiscal deadlock – due to the clash between then-Governor Bruce Rauner, a Republican, and the Democratic leadership of the General Assembly – that ended in July 2017.
Governor JB Pritzker, who took office in 2019, maintains a friendlier relationship with his Democrats, who hold overwhelming majorities. Pritzker, who is seeking a second term, will face state representative Darren Bailey, R-Xenia, in November’s general election.
The state is also attracting new revenue from sports betting, recreational cannabis sales and by closing loopholes in businesses that have helped “propagate state finances” and generated “hundreds of millions of dollars for local governments,” he said manar.
The finance team also emphasized that the state increased in population in the most recent update of the US census numbers, reversing the original census information that reported a loss.
And while investors are watching for earnings weakness, Sturm noted that earnings are ahead of budget for the first few months of the new fiscal year. The $46.4 billion budget for fiscal 2023 is based on conservative economic estimates that expect revenue to fall 7.8% amid the knowledge that the Federal Reserve is taking aggressive measures to slow the economy, to bring down inflation, Sturm said.
The revenue forecast will be updated this fall when the state releases a five-year annual forecast and Illinois will need to factor the slowing economy into forecasts for 2018, Sturm said.
The massive pension burden weighs most on the balance sheet, how the state would weather a recession and whether it would remain disciplined or return to one-off maneuvers by previous governments that left the state with a stack of bills is weighing on investors.
“It’s a selling point and they’ve made great strides” in building reserves and paying bills, but still have “a long way to go” to join other states in the 10% to 15% range, Howard said Cure, director of research for municipal bonds at Evercore Wealth Management LLC.
Illinois’ rainy day fund would need to more than double to hit the 5% mark. “They’ve shown some discipline” in how they’ve used ARPA and tax surpluses, “but have they really made a structural change in how they operate and will they have the discipline if there’s a recession,” said Cure, who attended remotely. He would like to see a more in-depth discussion of the country’s economic prospects.
“Given the heightened risk of recession, we are closely monitoring government revenues for signs of weakness. California, in particular, reported lower-than-projected revenue for the first two months of FY23,” said John Ceffalio, senior municipal research analyst at CreditSights, who also took away. “Illinois, on the other hand, continues to report strong monthly earnings. Through August, total government revenue is almost 7% higher than forecast.”
Ahead of last Wednesday’s Fed meeting, Ceffalio said he finds “Illinois spreads attractive to investors willing to accept volatility.
The state’s capital program approved $20 in borrowing and the state has tapped about $4 billion so far. The timing of future sales will be determined by project needs, Sturm told the crowd in response to questions about future borrowing.
Borrowing to completely wipe out the state’s federal unemployment insurance loan could be in the mix. The state directed $2.7 billion of its ARPA funds to repay the loan used to cover an Unemployment Trust fund deficit due to pandemic-related job applications, but $1.8 billion remains .
“The state continues to consider options for repayment of the remaining $1.8 billion, which could include issuance of bonds approved by the Illinois Unemployment Insurance Trust Fund Fund Financing Act,” the offer statement said. The bonds would not carry a GO promise and would require legal approval.
The Rainy Day fund, the team said, will see ongoing payments of 10% of cannabis revenue, or about $30 million annually, and a future monthly payment of $3.75 million beginning next July. “I wouldn’t be surprised if you see future proposals that reflect additional deposits beyond what we have today,” Manar said.
When asked about the impact of steep investment losses on the pension fund, Sturm noted that the state smoothes the results in its actuarial assessment over five years, so losses are cushioned as much as last year’s healthy returns.
Participation in the two buyout programs ranged from 1% to 26% of the three eligible state funds.
The state will report a 17% drop in OPEB liabilities from $58.7 billion to $48.5 billion in its next actuarial show for 2021.
In the latest assessment reports, all highlighted the state’s progress, but also the ongoing pressure that makes reaching the single-A category more difficult.
“If the state continues to improve pension, OPEB and BSF funding levels while shrinking the statutory structural deficit without other credit factors experiencing a significant deterioration, we could upgrade the rating,” S&P said. “While it is not necessary for us to consider an upgrade, a return to a shortened audit release period would be consistent with that of higher-rated competitors.”