Bonds

Trading spreads on Illinois GO bonds narrowed this week after the state’s latest rating upgrade, and an uptick in tax revenues could help keep the positive ratings momentum going if the state makes more headway on paying off debts and building reserves.

The state’s moves to build up its rainy-day fund, pay down debts, and make supplemental pension contributions have drawn a series of upgrades with the latest handed out by Moody’s Investors Service, which this week lifted the state’s general obligation and Build Illinois bond ratings to A3 from Baa1.  

S&P Global Ratings on Feb. 23 raised the state’s rating to A-minus from BBB-plus. Fitch Ratings rates Illinois BBB-plus and stable.

The three rating agencies have handed the state a series of upgrades over the last two years, moving it from the brink of a junk rating where the rating landed during the state’s two-year budget impasse that ended in mid-2017.

The state’s one-year/10-year/and 25-year GO maturities were set at a 75/145/165 basis point spread to Municipal Market Data’s AAA benchmark Thursday. That’s healthier than the 90/163/175 bp spreads just before the upgrade.

Stronger tightening on the short end mirrors current market preferences amid an inverted yield curve, but the maturities across the curve have tightened as the A rating opens the field of buyers.

“An A handle opens up more funds that can look at the name, said Peter Franks, director of market analysis at Refinitiv MMD. “Some funds can’t hold BBB credits and having both” gives the paper even more appeal as some funds might stipulate an A-level rating from a specific rating agency.

Tightening can also take time to pay out as the market digests the news, Franks added.

The state’s spreads at the start of February were at 120/173/185 and closed the month — after the Feb. 23rd S&P upgrade — at 90/163/175 bps. The state’s spreads widened this year from peak lows early last year when the 10-year was trading in the 60 to 70 bp range.  Market turmoil led to a sharp widening during 2022 as a round of upgrades were muted by rising interest rates and mutual fund outflows.

A hike in revenue estimates heading into the new fiscal year could pave the way for additional deposits into the rainy-day and pension stabilization funds along with tax relief, Illinois Gov. J.B. Pritzker said.

The state expects another $575 million of general fund revenues in the current fiscal year as steady income and sales tax collections through February pushed worries over an economic slowdown and the impact of a potential recession further out on the horizon, according to the legislature’s non-partisan Commission on Government Forecasting and Accountability, or COGFA.

The agency put fiscal 2024 estimates at $50.4 billion, which tops the Governor’s Office of Management and Budget’s $49.9 billion projection by $465 million, with the difference attributed mostly to the commission’s higher fiscal 2023 base heading into the new fiscal year.

“There will obviously be some conversation with the General Assembly,” Pritzker said after a public appearance Wednesday when asked about COGFA’s latest forecast. “We are already putting money into the rainy-day fund. That’s another thing we could consider with these surpluses. We still have more that we can do with regard to pensions.

Tax relief is also on the table, but Pritzker said he wants to proceed with caution. “I would like to see — as we feel comfortable with these new revenues coming in and their stability and I think we are seeing a few years in a row now of the stability of that revenue — that we should be talking about whether there are tax cuts we can implement … if we see stability in these revenues,” Pritzker said.

“We don’t want to spend more than we are taking in and it’s one of the reasons we’ve been able to run surpluses if we’ve been conservative with our revenue estimates,” Pritzker said.

Pritzker’s comments come as lawmakers are sorting through his proposed $49.6 billion general funds budget that leaves a $300 million balance.

The proposed package raises spending in areas like education and human services, pays down an additional $50 million in outstanding bills, and makes a $200 million supplemental contribution to the pension system above the $9.8 billion statutory contribution. The state has made $500 million in supplemental contributions over the last two budget cycles.

Pritzker proposed sending another $138 million from the anticipated $303 million fiscal 2024 ending balance to the rainy-day fund. The rainy-day account would also receive $45 million in what marks the first installment of the unemployment trust fund repayment of a $450 million 10-year state loan. Those additions along with a $1.17 billion deposit coming from a previously announced infusion from surplus revenues this year would bump the rainy-day fund to over $2 billion by the close of fiscal 2024.

All three rating agencies have listed the state’s supplemental pension payments, the rainy-day fund deposits, the paying down of other debts, and moves toward structural balance as metrics that have driven the upgrades with further progress viewed positively.

COGFA said personal, corporate, and sales tax collections are all faring better than it had forecast in November, when it raised its projections by $4.9 billion to $51.3 billion.

“In every single month so far this fiscal year we’ve actually had a gain where we’ve generated more revenue in this fiscal year compared to the same time a year ago,” Eric Noggle, COGFA’s senior revenue analyst said at a commission meeting Tuesday to lay out the forecast.

The governor’s budget office in November raised its guesswork by $3.7 billion and much of that surplus was doled out in a special appropriations package and in the proposed 2024 budget.

After factoring in this year’s projections and the economic outlook drawn from Moody’s Analytics and other business and academic organizations, the commission projects $50.4 billion of general fund revenues in the coming fiscal year that begins July 1.

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