Illinois bond sale will test investor appetite

Illinois will turn to the bond market this week to generate cash to make its pension payment.

February 22, 2011

The State of Illinois will find out this week how willing investors are to buy the state’s bonds, which are rated the lowest in the country by Moody’s. The state plans to sell $3.7 billion worth of bonds as early as tomorrow to make this year’s pension payment.  

Brian Battle is a director with the Chicago-based investment advisory firm Performance Trust Capital Partners. He says this move to pay current obligations with borrowing is just a short-term fix that does nothing to solve the state's longer-term pension problem.  

"It’s taking one credit card and paying off a different one," Battle says. "You owe the money to the pension plan? Oh, now abracadabra, you owe the money to the bond holders. That is known as a budget gimmick. This is not known as a typical way to manage your pension liabilities."  

Battle says because the state’s bonds are rated so poorly, Illinois will likely have to pay investors the highest interest rate of any state.

And the sale won’t do anything to fill the state’s pension shortfall from prior years. That totals about $86 billion.