January 30, 2013 11:43 pm

Illinois pulls $500m bond sale

Illinois on Wednesday pulled a $500m bond sale after a downgrade by Standard & Poor’s heightened concerns about the American state’s inability to improve its finances.

The postponement comes just five days after the agency last week cut the state’s credit rating from A to A-, citing the failure to address a $96bn unfunded pension liability, the worst in the nation.

“Our conversations with potential bidders led us to believe the market is unsettled because of recent actions and comments by the bond rating agencies,” said Abdon Pallasch, the state’s assistant budget director.

Illinois plans to go ahead with the sale at a later date. The proceeds from the bond were intended to fund projects including schools construction and transportation infrastructure.

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

S&P’s downgrade last week affected about $26bn in debt and left Illinois’ bonds only four notches above junk, alongside California as S&P’s lowest-rated state. Fitch lowered the state’s ratings this month and a Moody’s downgrade last year gave Illinois the lowest credit rating in the nation.

Illinois’ pension system is only 35 per cent funded, much lower the 80 per cent threshold considered “healthy”, according to data from Boston College’s Center for Retirement Research.

American states have been under pressure since the recession ripped large holes in their budgets as tax revenues plummeted. Many states have slashed spending and their revenues are now modestly growing.

While Illinois raised state income tax rates by 67 per cent and business taxes by 30 per cent in 2011 to help stabilise its finances, filling the pensions gap remains difficult, with annual state and local tax revenues amounting to only about $55bn.

Illinois’ public employee pension costs are expected to increase by $1bn in the 2013 fiscal year, more than twice as much as originally thought, because of poor investment returns and longer life expectancies.

The previous state legislature was unable to pass pension reform despite public calls from the state’s governor, unions and civic groups. A new batch of lawmakers, sworn in this month, has yet to take action on the issue.

S&P warned of further downgrades for the state given that its poor record over the past two years suggested legislative consensus on reform “will be difficult to achieve”.

Investors are demanding the second highest premiums on bonds sold from Illinois – or 135 basis points over comparable general obligations – among the 50 US states tracked by Municipal Market Data.

Additional reporting by Nicole Bullock in New York

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