Illinois returns to muni market with $750 million bond sale

The deal tops the $12.2 billion of bonds and notes states, cities, schools and other issuers plan to sell in the last week of November, according to preliminary estimates by Thomson Reuters on Wednesday.

With credit ratings hovering just above the junk level, Illinois has had to pay a hefty penalty to sell its debt to investors worried about the state's ongoing financial and political problems.

An impasse between Illinois' Republican governor and Democrats who control the legislature left the state without a complete budget for an unprecedented two fiscal years. Lawmakers enacted a fiscal 2018 budget and income tax rate hikes over Governor Bruce Rauner's vetoes in July.

The impasse ballooned the backlog of bills from vendors and service providers to an all-time high of nearly $16.4 billion, which was deflated to $9.5 billion with proceeds from October's $6 billion general obligation bond sale.

An investor presentation for the upcoming $750 million GO bond sale pointed to "improving" credit fundamentals that included the legislature's action boosting the personal income tax rate to 4.95 percent from 3.75 percent and the corporate rate to 7 percent from 5.25 percent. Still, as a candidate for reelection next year, Rauner has called for repealing the tax hike, which is expected to generate more than $4 billion annually.

Earlier this week Rauner tweeted that the nation's fifth-largest state was"at the edge of disaster" as he underscored the importance of the next gubernatorial election to easing Illinois' financial difficulties.

Among Illinois' unresolved problems is a $130 billion unfunded pension liability and state constitutional protections for public worker retirement benefits which threaten to overwhelm state finances.

"Without changes to the promised retirement debt, the state will be swallowed up. It's an actuarial certainty," said John Mousseau, fixed income director at Cumberland Advisors, who added he will not be participating in the deal. 

The prospectus for next week's bond sale also warns "there can be no assurance that a budget will be enacted in future fiscal years."

The two-part competitive sale set for Wednesday consists of $655 million of bonds with maturities from 2018 through 2042 to fund capital projects and $95 million of bonds due in 2018 through 2027 to finance information technology.

(Reporting By Karen Pierog; Editing by Andrew Hay)