(Bloomberg) — Illinois's budget stalemate is leading investors to demand higher yields to lend to its towns and villages, causing bond sales to tumble while borrowers outside the state rush to capture the lowest interest rates in a generation.
The drop in issuance this year stands in contrast to the rest of the $3.6 trillion U.S. municipal market, where bond offerings are on pace to reach the highest level since at least 2002, according to data compiled by Bloomberg. Illinois is one of only five states where they've fallen: issuers have sold $8.4 billion of debt through Sept. 11, down from $9.9 billion a year earlier. It's the biggest decline nationwide.
When municipalities do borrow, investors are requiring higher yields because of the association with the state, said Tim McGregor, head of municipals at Northern Trust Corp. in Chicago.
Illinois, with the lowest credit rating of any state, has been without a budget since the year began on July 1 because of a political standoff. That's forcing Illinois to leave some bills unpaid and casting doubt over how it will close a $6.2 billion shortfall.
"You're definitely getting a little extra yield as an investor, even in credits that may not have a direct link to the state," said McGregor, who oversees $27 billion of state and local government securities.
The financial pressure on the local governments has been underscored by Chicago, whose credit rating was cut to junk by Moody's Investors Service in May because of the soaring bills the city faces from its underfunded employee pension funds. It isn't alone: Half of the state's local retirement systems have less than 60 percent of the assets needed to cover all the benefits due as workers retire, according to a commission created by the legislature.
Bond buyers will have their choice of two large deals from the state this week. The Metropolitan Pier and Exposition Authority, which runs Chicago's convention center, is selling $223 million of bonds Wednesday. OSF Healthcare System, a hospital operator, plans to offer $368 million of tax-free debt through the Illinois Finance Authority on Thursday.
McGregor said Illinois hospitals are being penalized for the state's crisis.
"Health-care bonds in Illinois are probably trading 25 to 50 basis points cheaper, just because of the situation in Illinois, than they would be otherwise," said McGregor.
There's no sign of a resolution to the budget impasse, which has lasted longer than any in the state's history, according to the Civic Federation, a Chicago-based research group. Republican Governor Bruce Rauner and the Democrat-led legislature can't agree on how to fix a deficit left after temporary tax increases expired.
