Illinois enjoyed a better fiscal picture this week when it met with the buy side than it did at its last event in 2019 when its ratings teetered on the brink of junk, but investors still worry about how the state will survive a potential recession and their prospects for moving forward.
Top Illinois financial executives held the event in person and online to provide financial reviews and answer questions ahead of a $700 million competitive general commitment sale scheduled for Wednesday.
Proceeds from the sale will fund capital projects, with $140 million going to the state’s ongoing pension buyout programs aimed at reducing underfunded liabilities. This year, the state extended the deadline for the pension purchase program to 2026 and increased loans from $1 billion to $2 billion. With the upcoming sale, the state will have tapped into $1.15 billion.
The deal comes amid a market mired in continuing outflows of bond funds and rising interest rates amid Federal Reserve moves aimed at curbing inflation. State spreads, while still tight compared to highs in 2017 and then the early days of the COVID-19 pandemic, widened 10 basis points to a spread of 133/139 bps vs. AAA benchmark market data of Municipal of 123/129 bp since the middle of last week.
To its credit, the state is hitting the market with a new round of spring updates. “We have the strongest financial foundation in recent state history,” Andy Manar, assistant governor for fiscal and economic affairs, told the 150 attendees, who included a mix of investors, bankers and other market professionals, at the meeting. on Wednesday.
“We have the strongest financial foundation in the state’s recent history,” Andy Manar, deputy governor for fiscal and economic affairs, told the 150 participants, including a mix of investors, bankers and other market professionals, in person and online. remotely at Wednesday’s investor conference. meeting.
“We have been working very hard during this strong economic performance here for the last 18 months to really address some of the debt that we inherited in 2019 and try to make sure that we are saving for the future through permanent income streams and the Trust Fund. fiscal stabilization while also providing some fiscal relief,” said Alexis Sturm, director of the Office of Management and Budget, who made a presentation with Manar and Capital Markets director Paul Chatalis.
Like most states, Illinois’ tax revenue increased last year when it received its share of ARPA funds (about $8 billion) that the state used to advance several of its long-standing chronic wounds, including settlement of overdue bills, which peaked in 2017 at nearly $17 billion.
The Barren Rainy Day Fund received a $1 billion infusion this year, with the state also injecting another $500 million for its onerous $139.9 billion pension plan. The advances raised the sovereign’s ratings to BBB-plus from Fitch Ratings and S&P Global Rating and a corresponding Baa1 from Moody’s Investors Service. The latest updates have followed several over the past year, but it remains the lowest rated condition.
The state is now two points above its low reached during a two-year fiscal standoff, due to the standoff between then-Governor Bruce Rauner, a Republican, and the Democratic leadership of the General Assembly, which ended in July 2017.
Governor JB Pritzker, who took office in 2019, has a friendlier relationship with his Democrats, who have overwhelming majorities. Pritzker, who is seeking a second term, will face state Rep. Darren Bailey, R-Xenia, in the November general election.
The state is also attracting new revenue from sports betting, recreational cannabis sales and closing loopholes in businesses that helped “spread state finances” and generated “hundreds of millions of dollars for local governments,” Manar said.
The finance team also noted that the state increased in population in the most recent update to US Census figures, reversing data from the original census that reported a loss.
And while investors are keeping an eye on earnings weakness, Sturm said earnings are above budget for the first few months of the new fiscal year. The $46.4 billion budget for fiscal 2023 is based on conservative economic estimates that expect revenue to fall 7.8% amid knowledge that the Federal Reserve is taking aggressive steps to slow the economy and reduce inflation, he said. Sturm.
The revenue forecast will be updated this fall when the state releases a five-year annual forecast, and Illinois will need to factor the slowing economy into forecasts for 2018, Sturm said.
The huge burden of pensions weighs more heavily on the balance sheet, how the state would weather a recession and whether it would remain disciplined or revert to the unique maneuvers of previous governments that left the state with a stack of bills is weighing on investors.
“It’s a selling point and they’ve made great strides” in creating reservations and paying bills, but they still have “a long way to go” to join other states in the 10% to 15% range, Cure said. , director of research. for municipal bonds at Evercore Wealth Management LLC.
Illinois’ emergency fund would need to more than double to reach the 5% mark. “They have shown some discipline” in the way they have used ARPA and fiscal surpluses, “but they have really made a structural change in the way they operate and they will have the discipline if there is a recession,” said Cure, who attended. remote form. . She would like to see a deeper discussion of the country’s economic prospects.
“Given the heightened risk of a recession, we are closely monitoring government revenues for signs of weakness. California, in particular, reported lower-than-projected revenue for the first two months of FY23,” said John Ceffalio, senior municipal research analyst at CreditSights, who also kept track. “Illinois, on the other hand, continues to report strong monthly earnings. Through August, total government revenue is nearly 7% higher than anticipated.”
Ahead of last Wednesday’s Fed meeting, Ceffalio said he finds “Illinois spreads attractive to investors willing to accept volatility.
The state’s capital program approved $20 in loans and the state has used about $4 billion so far. The timing of future sales will be determined by the needs of the project, Sturm told the crowd in response to questions about future loans.
Borrowing to completely eliminate the state’s federal unemployment insurance loan could be in the mix. The state earmarked $2.7 billion of its ARPA funds to repay the loan used to cover an unemployment trust fund shortfall due to pandemic-related job applications, but $1.8 billion remains.
“The state continues to consider options for payment of the remaining $1.8 billion, which could include the issuance of bonds approved by the Illinois Unemployment Insurance Trust Fund Financing Act,” the offering release said. The bonds would not carry a GO promise and would require legal approval.
The Rainy Day fund, the team said, will see ongoing payments of 10% of cannabis revenue, or about $30 million annually, and a future monthly payment of $3.75 million beginning next July. “I wouldn’t be surprised if you see future proposals that reflect additional deposits beyond what we have today,” Manar said.
When asked about the impact of heavy investment losses in the pension fund, Sturm noted that the state smoothes out the results in its actuarial assessment over five years, so losses are cushioned as much as last year’s healthy returns. .
Participation in the two buyout programs ranged from 1% to 26% of the three eligible state funds.
The state will report a 17% drop in OPEB liabilities from $58.7 billion to $48.5 billion in its next actuarial sample for 2021.
In the latest evaluation reports, all highlighted the progress of the state, but also the constant pressure that makes it more difficult to reach the unique-A category.
“If the state continues to improve pension, OPEB and BSF funding levels while reducing the statutory structural deficit without other credit factors experiencing significant deterioration, we could upgrade the rating,” S&P said. “While we do not need to consider an upgrade, a return to a shorter audit posting period would be consistent with higher-rated competitors.”
Source : localtoday.news