Illinois’s Road and Bridge Bond Runs Smack Into a Supply Glut

(Bloomberg) -- Illinois already has to pay up when the worst-rated state borrows money from Wall Street. Now, as the state kicks off a $45 billion capital spending plan, it will have to compete with a crowd of issuers flooding the $3.8 trillion municipal debt market trying to capture cheap rates.

Illinois is scheduled to issue $750 million in general obligation bonds this week for Governor J.B. Pritzker’s six-year “Rebuild Illinois” infrastructure plan, intended to infuse funding into roads, bridges, railways, broadband and schools. The debt likely will need to come with “more attractive yields,” amid the supply glut, said Michael Belsky, executive director of the University of Chicago’s Center for Municipal Finance. Still, the state could get within 100 to 150 basis points of the benchmark AAA index, he said.

“I anticipate that it’ll be well received. It’ll probably have some spread,” said Dora Lee, director of research for Belle Haven Investments, which holds Illinois bonds among $10 billion of municipal debt.

The sale -- through a competitive auction Wednesday -- comes as interest rates are at near half century lows, prompting states and local governments to rush into the market to lower their borrowing costs and as investors scrounge around for better-paying yields. Issuers are expected to sell about $13.2 billion this week, about 140% of the three-year average for the forty-fifth week of the year, according to Citigroup Inc. municipal analysts led by Vikram Rai.

Related: Municipal Bond Deals Barrel Toward Elusive $400 Billion Mark

Pension Liabilities

As Illinois comes to market, its large pension and debt liabilities hang over the state’s fiscal picture, said Eric Kim, senior director in Fitch Ratings’ U.S. public finance group. Illinois has $134 billion of unfunded pension liabilities as of the end of fiscal year 2018, bond documents show. The retirement debt has weighed on the state’s credit rating and spurred investors to demand extra yield to hold the state’s debt. The yield-penalty on 10-year Illinois GOs is the highest of all 20 states tracked by Bloomberg.

After years of missteps by the state, Fitch is watching how Illinois manages its finances going forward, including if voters approve a graduated income tax in the November 2020 election, Kim said. The state’s economic growth also has lagged the broader expansion in the country but the tone in Springfield, the state capital, has been “a lot more harmonious” in 2019 after years of discord surrounding the budget process, he said.

Illinois’ capital plan, Pritzker says, will create an estimated 540,000 jobs and support economic development by investing in the Midwestern state’s aging infrastructure. It’s the state’s first multi-year capital program since 2009.

Federal assistance for infrastructure has not been rising much faster than inflation, causing state and local governments to look to their own taxpayers to invest themselves, said Adie Tomer, a fellow at the Brookings Institute. Over the last two to three years, state and local governments have realized the federal government under the Trump administration would shift to a “junior partner” for infrastructure investments from a “senior partner” in the past, said Michael Pagano, dean of the University of Illinois at Chicago’s College of Urban Planning and Public Affairs.

“They have too many unmet needs,” Pagano said. “They are not going to wait for the federal government to decide to lead.”

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net

To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, Michael B. Marois

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