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UPDATE 1-Illinois to sell $1 bln of GO bonds on Feb. 6 -state official

Monday, 13 Jan 2014 | 2:41 PM ET

CHICAGO, Jan 13 (Reuters) - Illinois will sell $1 billion of general obligation bonds on Feb. 6 in its first tax-exempt debt deal since enacting reforms to its public pension system last month, a state official said on Monday.

John Sinsheimer, the state's capital markets director, said the bonds will be priced through Citibank, with proceeds earmarked for the state's ongoing capital improvement program.

"We're going to do an extensive road show. We have a lot to talk about with investors," Sinsheimer said.

The biggest development is a new law, which takes effect in June and is aimed at easing the state's $100 billion unfunded pension liability. Changes to pensions, including higher retirement ages and the reduction and suspension of cost-of-living adjustments for retiree pension payments, are expected to save Illinois $160 billion over 30 years.

Illinois teachers, school administrators and retirees have filed class-action lawsuits seeking to void the law, claiming it violates state constitutional protections for public retirement benefits.

The continued failure to address the pension problem led credit rating agencies to hammer Illinois' bond ratings to the lowest levels among states. Investors, meanwhile, have demanded heftier yields for the state's bonds.

Illinois' so-called credit spread narrowed in the latest week to 130 basis points from 145 basis points over Municipal Market Data's benchmark yield scale for triple-A-rated debt due in 10 years. Still, the state continues to have the widest spread after Puerto Rico among major municipal debt issuers tracked by MMD, a unit of Thomson Reuters.

Sinsheimer said investors will also be told about the state's recent three-year budget forecast. Projections released by the state earlier this month indicate growing deficits starting in fiscal 2015 due largely to the partial expiration of income tax rate hikes enacted in 2011, effective Jan. 1, 2015.

Personal income tax revenue is expected to fall by $1.7 billion and corporate tax collections are forecast to drop by $325 million due to the expiration, although the Democrat-controlled legislature could vote to extend the full tax hike.

The state sold $350 million of taxable GO bonds on Dec. 12, just a week after Governor Pat Quinn signed the pension reforms into law.

Illinois was the fourth-biggest debt issuer in the U.S. municipal market in 2013, selling $3.35 billion of bonds, according to Thomson Reuters data.