September 3, 2010
Earlier this week the Institute for Illinois’ Fiscal Sustainability at the Civic Federation released a comparative analysis of the cost of the $9.6 billion in bonds the State of Illinois issued over the past year. The report estimated that the State might pay as much as $551.3 million in additional interest costs for only one year’s worth of borrowing because of its ongoing fiscal crisis and subsequent reductions in its bond rating.
The analysis calculated the cost of the bonds sold by the State in the past year based on yields and compared to the cost charged to other state and local governments that maintained higher credit ratings and sold bonds under similar market conditions. By applying the yields charged to better-rated governments to the Illinois issuances, an estimate was made of the additional long-term cost the State will pay for access to the credit market.
The comparable issuances were chosen first by date to preserve the market conditions in which the Illinois sales took place. Comparable issuances were then sorted by rating. When available, comparable bonds with ratings similar to Illinois’ former AA rating in December 2008 were used. In some cases due to the term of the comparison bonds used, several issuances were needed to provide yields for the entire term of the Illinois bonds. The investment proceeds of some municipal bonds are exempt from federal taxation and treated differently in the market, so the tax status of each of the bonds was also matched. The data for the report was collected using the Municipal Securities Rule Making Board’s online database known as the Electronic Municipal Market Access, where the official statements that accompany government bonds are searchable and available free to the public.
In order to preserve similar market conditions, many of the bonds sold around the same time as Illinois bonds and available for comparison were issued by smaller city governments, school districts and county authorities. As explained in the report, the cost that lenders will charge a government to issue bonds is dependent on many factors, including but not limited to bond ratings. Investors may treat some of the smaller governments and smaller bond issuances differently than the debt sold by a larger government such as the State of Illinois. However, because of the overall size of their tax base and the ability of local governments to file for bankruptcy, a protection not afforded to state governments, typically local governments rated the same as a state government are treated as higher risk investments. No state has ever defaulted on a bond but there is a long history of local government bond defaults. That would lead in most cases to a similarly rated local government bond to be priced higher than state bonds. This likely leads to more conservative estimate of the additional cost the State has been charged to issue debt over the past year than if it had only been compared to only bonds issued by other states.
The IIFS analysis comes as the State prepares to sell up to $1.75 billion in Tobacco Securitization Bonds, which will be used to pay down some of the $5.8 billion operating shortfall in the FY2011 budget enacted by the General Assembly. The State could sell as much or more debt in FY2011 than in the last year. Without substantial improvement in the State’s fiscal condition, additional bond sales over the next year could result in even higher additional borrowing costs than the $551.3 million estimated for last year’s bonds.
The State currently has a large amount of authorized but unissued debt it could sell, including $5.0 billion in capital purpose General Obligation Bonds (GO Bonds), $1.7 billion in Refunding Bonds and $700 million Build Illinois Bonds. The Governor has also stated that he plans to continue to pursue borrowing approximately $4 billion to make the required FY2011 payment to the State’s retirement systems. As part of the ongoing capital program, the State has also appropriated $7.7 billion in total projects above the authorized GO bond level and $1.9 billion worth of additional projects to be paid for with Build Illinois Bond funds above the current authorized debt total.