Bloomberg News

Dedicated-Revenue Debt Outperformance Aids Illinois: Muni Credit

November 02, 2011

Oct. 25 (Bloomberg) -- The fastest recovery in state revenue since 2006 is helping bonds backed by dedicated taxes outperform general-obligation debt by the most in a year. That’s allowing Illinois, tied with California for the lowest credit rating, to borrow $300 million at the top grade.

Dedicated-revenue bonds have earned 8.5 percent this year through Oct. 21, according to Standard & Poor’s indexes tracking price changes and interest payments. That’s more than the 7.8 percent for debt backed by a general-obligation pledge and the best outperformance in a year, according to the S&P indexes.

“You have a secure source of income” not subject to the need by many state legislatures to cut budgets, said Alan Schankel, director of fixed-income research for Janney Montgomery Scott LLC in Philadelphia, which manages $11.8 billion in fixed income. “Generally, they’re out of the political realm” and “not an issue on Election Day.”

U.S. states’ tax revenue jumped 10 percent in the second quarter from a year earlier, the most since 2006 and the sixth straight gain, the Census Bureau said last month. Illinois sales levies rose 13.3 percent in the fiscal first quarter that ended Sept. 30 and have “significantly exceeded” projections, said Kelly Kraft, a budget office spokeswoman.

Illinois lawmakers raised corporate and personal-income taxes while keeping sales levies unchanged in passing a $33.2 billion fiscal 2012 general-fund budget. Democratic Governor Pat Quinn says that’s insufficient to run the state through the end of the fiscal year. Legislators also ended their session June 1 without paying an estimated $6.2 billion in overdue bills.

Lowest Rating

Moody’s Investors Service rates Illinois’s general- obligation debt A1, the lowest among states. It gave $25 billion of bonds a negative outlook last year, meaning the rating could be cut, in part because the state’s pensions lack sufficient funds to pay promised obligations.

The Illinois pension system has assets to pay only 45 percent of benefits, according to data compiled by Bloomberg, the lowest so-called funded ratio of any state.

S&P rates Illinois A+, two levels above California, its lowest-ranked state at A-. It gives the bonds being sold this week its highest grade of AAA because of the “substantial” sales-tax revenue used for repayment.

Investors will be able to separate the soundness of the sales-tax debt from the fiscal problems of Illinois, said Justin Hoogendoorn, managing director of the strategic analytics group at BMO Capital Markets GKST Inc. in Chicago.

Ample Revenue

“They aren’t going to look just at the ratings,” Hoogendoorn said. “They’ll look at ample amounts of revenue backing it. How likely is this bond to be paid off in a stressed scenario? The reality is there is very, very good coverage.”

The $300 million of sales-tax bonds are being sold under the Build Illinois program, created in 1985 to fund infrastructure, transportation, education, environmental- protection and business-development projects.

The state will take offers from investors for either taxable or tax-exempt yields, so “the bidders will decide,” said John Sinsheimer, the Illinois capital markets director.

The state’s $84 billion of unfunded pension liability shouldn’t be a concern, he said from his Chicago office.

“This is a triple-A-rated piece of paper,” Sinsheimer said. “These bonds are not impacted by the pension issues.”

Trading Price

A tax-exempt Build Illinois revenue bond due in June 2021 was priced in December 2009 at 107.8 percent of face value to yield 4 percent. It traded on Oct. 20 at 108 percent to yield 3.78 percent, according to data compiled by Bloomberg.

The state, the fourth-largest municipal borrower, can issue up to $5.7 billion of Build Illinois bonds, according to S&P. After this week’s sale, about $2.2 billion will be outstanding, it said.

The bonds are backed by 1.75 percent of total sales taxes collected by the state’s 6.25 percent levy, S&P said. After deducting the dedicated revenue, Illinois took in $7.1 billion of sales taxes last fiscal year, S&P said, 6.6 percent more than the previous year but still below fiscal 2008 levels.

“Despite the recessionary decline, sales-tax revenues continued to provide what we consider extremely strong coverage of projected maximum annual debt service,” S&P said.

Following is a description of planned municipal bond sales:

NORTH TEXAS TOLLWAY AUTHORITY, which covers four counties, plans to sell $674 million of revenue bonds as soon as this week, according to a preliminary official statement. The bonds will help finance a 27.6-mile toll road in Fort Worth. A $78 million tranche is taxable. JPMorgan Chase & Co. will lead the deal. The bonds are rated AA, Fitch Ratings’ third-highest grade. (Added Oct. 25)

PENNSYLVANIA TURNPIKE COMMISSION will sell $226 million of subordinate revenue bonds as soon as this week for capital projects, according to a preliminary official statement. One tranche of approximately $100 million will be funded by taxes and fees. Moody’s rated that portion Aa3, its fourth-highest grade. Citigroup Inc. will lead the deal. (Added Oct. 25)

PUBLIC UTILITY DISTRICT NO. 1, of Chelan County, Washington, will sell $164 million of taxable revenue refunding bonds as soon as this week, according to a preliminary official statement. The district, which serves about 73,000 people, owns and runs three hydroelectric power plants. Barclay’s Capital will lead the deal. (Added Oct. 25)

MICHIGAN FINANCE AUTHORITY, created last year by combining 10 public finance authorities, plans to sell $294 million of tax-exempt revenue-refunding bonds as soon as this week, according to a preliminary official statement. Bank of America Merrill Lynch will lead the sale. The bonds carry S&P’s top grade. (Added Oct. 24)

--With assistance from Andrea Riquier in New York. Editors: Jerry Hart, Mark Schoifet

To contact the reporter on this story: Tim Jones in Chicago at

To contact the editor responsible for this story: Mark Tannenbaum at

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