Illinois borrowed $550 million on Thursday to fund mass transit and road construction projects, paying a price in the bond market for its worst-in-the-nation credit rating and record-setting budget impasse.
Despite historically low borrowing rates, the state had to settle for an interest rate of 3.75 percent on bonds with maturities that range from one to 25 years. By comparison, states in the best financial standing can borrow long term at an interest cost of about 2 percent based on market conditions.
The interest rate did beat the 4 percent Illinois got on a $480 million bond issue in January, and Republican Gov. Bruce Rauner's office contends it's the "lowest interest rate the state has ever received for a general obligation bond sale with a similar final maturity."
"It's clear from today's bond sale that investors realize Illinois now has a governor that is trying to turn the state around and right its financial ship," Rauner spokeswoman Catherine Kelly said in a statement.
Market experts say there were other factors at play. Rates are lower now than they were in January, and a series of global economic factors have created a situation in which investors are hungry for opportunities, even if it means dealing with a politically stalemated state such as Illinois.
"Municipal bond rates for the whole market are at a record low right now. If Illinois didn't record its lowest bond yield ever, it would imply a major problem," said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.
Still, there was anxiety about the sale after two Wall Street ratings agencies issued downgrades to the state's credit ratings last week. Moody's Investors Service downgraded about $26 million in general obligation bonds to two notches above junk status and took state construction bonds down a notch as well. Standard & Poor's pegged the state's credit rating at BBB+, three notches above junk status in that company's rating system.
One municipal bond expert estimates that the downgrades cost the state $12 million in Thursday's bond issue.
"Interest rates for everybody have declined, including Illinois, but Illinois' interest rates have not declined as much as everybody else's because their credit has deteriorated," said Martin Luby, a former investment banker and assistant professor in the School of Public Service at DePaul University, who analyzed the results of the sale.
The credit downgrades came days after BlackRock Inc., the world's largest money manager, suggested Illinois should be denied market access because of its budget and pension problems. And the sale happened shortly after the Democrat-controlled General Assembly concluded its regular legislative session in May without sending the governor a budget.
Viewed through that lens, the sale could be interpreted as unfortunate by those who had hoped market pressures might force an end to the budget impasse.
"Short-term, it's a good result because it means the cost of borrowing is lower," Fabian said. "Long-term, the market is exerting no discipline, so there's no message getting through to the legislature saying that they need to change their behavior."
The bond issue attracted bids from 10 companies, with Bank of America Merrill Lynch emerging as the winner.
Rauner's office said the money will allow "critical road construction projects and other transportation projects to continue," but offered few specifics about how the money would be spent. Mass transit projects will receive $330 million and $200 million will be spent on road construction, with the remaining $20 million going to other construction projects, the governor's office said.
The administration also was vague about how much of the money can be spent without an appropriation from the General Assembly, saying only that "a portion" of the proceeds could be expended without action from the legislature. That's significant, considering Rauner and lawmakers remain unable to agree on spending for higher education, government operations and social service programs that have gone underfunded or entirely unfunded for nearly a year.
Illinois first gained notoriety as the state with the worst credit rating in the nation in 2013 under then-Gov. Pat Quinn. At the time, the distinction was largely driven by the state's massive pension debt.
In the 18 months since Rauner took office, he and lawmakers have been locked in an epic battle over a budget for state government, with the governor insisting that lawmakers first approve his economic agenda, which includes changes to workers' compensation and limits on collective bargaining. Rauner says those changes are crucial to jump-starting the economy, while Democrats contend they would hurt the middle class.
Asked Tuesday if it was wise to turn to the bond market while the state's political and financial situation is in such disarray, Rauner contended that bond buyers were on his side.
"I've talked to many bond buyers, I know investors," said Rauner, a former private equity investor. "The bad news is, they're fed up with the financial mismanagement of the state of Illinois. ... The good news is, many of them have indicated confidence in what we're trying to do in our administration. ... The reforms that we're advocating are supported by investors. And they believe in our administration and the potential future for Illinois."
It was a departure from what the governor said in February, when he was pushing loudly for a state takeover of Chicago Public Schools and suggesting bankruptcy for the school district as it was preparing to go to market with its own bond sale. At the time, Chicago Democrats questioned whether Rauner was trying to rattle investors ahead of the bond sale, but the governor rejected the notion.
"Bond holders will make their own decisions," Rauner said. "I don't interact with them. I don't talk to them. Frankly, I don't much care about them one way or another."
CPS ended up borrowing $725 million, with some of its bonds promising yields of as much as 8.5 percent.
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