By Karen Pierog & Dave McKinney
Illinois has never missed a bond payment, but the state for the first time is addressing that doomsday scenario in a document filed ahead of a scheduled $550 million bond sale this week.
In the prospectus for its June 16 sale of $550 million of bonds, dated June 6, Illinois warned that if it were to miss a payment, bondholders’ ability to collect their money could be delayed by court proceedings or other actions out of the state’s control. This is the first time the state has highlighted such a warning, though its lawyers have given similar notice in opinions appended to prior offering documents.
“It’s a pretty cautious, if alarming, statement,” said Richard Ciccarone, who heads Merritt Research Services, which analyzes municipal bond issuer data. The warning should increase investor anxiety over buying the bonds, he added.
Standard & Poor’s last week also questioned whether the state could “maintain adequate debt-paying capacity” because of deteriorating finances and political gridlock.
The politically gridlocked state is poised to enter a new fiscal year on July 1 without a budget for the second time since Republican Governor Bruce Rauner took office in 2015. The nearly 12-month impasse – at a time when Illinois has the worst-funded pension system among the 50 states- marks a level of fiscal paralysis not seen in the United States at least since the Great Depression. No state has gone a full year without a budget since at least the 1930s, according to the National Conference of State Legislatures.
The budget impasse is beginning to exact significant monetary costs. Of the state’s $7.6 billion backlog of unpaid bills, $4.1 billion represents obligations incurred without appropriations from the state legislature, raising questions about whether the state legally can pay those bills.
Illinois Budget Director Tim Nuding in a presentation to potential investors this month said the state cannot make the $4.1 billion in payments without appropriations from the legislature. A state legislative committee has held hearings on the question.
The $7.6 billion backlog means Illinois will top the record $317 million in late-payment fees it set in fiscal 2013, according to projections from the state comptroller’s office. Moody’s Investors Service is projecting the state’s total backlog of unpaid bills could hit $14 billion in the coming months, surpassing Illinois’ previous high of $10 billion in 2012.
Rauner himself has become the defendant in a recent lawsuit from a consortium of social-service providers demanding more than $100 million in payment for services already provided. One of the plaintiffs, the Ounce of Prevention Fund, is run by the governor’s wife, Diana Rauner.
Illinois’ warning to bond investors comes as the state’s $26 billion of general obligation debt inched closer to “junk” status with a new round of rating downgrades by Moody’s Investors Service and S&P last week.
The Rauner administration’s disclosure of a potentially disrupted bond payment scenario represents a “hedge against the worst, worst case scenario,” said John Schomberg, former general counsel to Democratic former Governor Pat Quinn.
Rauner’s political opponents are questioning the governor’s decision to sell bonds in the face of such uncertainty. “If you’re going to provide disclosure you can’t pay the bonds, why are we floating the bonds in the first place?,” said state Representative Stephanie Kifowit, a Democrat on the legislative committee looking into the state’s backlog of unpaid bills.
Illinois’ Republican state comptroller, Leslie Munger, told reporters on Thursday she could “envision no scenario” in which the state would miss a debt payment. General obligation bonds are secured by Illinois’ full faith and credit, and money for such bonds is placed into a fund each month exclusively for principal and interest payments.
If a bond payment were missed, bondholders could ask the Illinois Supreme Court to compel payment, but would need to compete against litigation in other courts also seeking payment, said Schomberg, who today is senior counsel at law firm Clark Hill in Chicago.