The inability to curb public pension costs in Illinois led its biggest county to hike the sales tax rate on Wednesday and left its largest city, Chicago, facing hefty interest rates for its bonds.
Underwriters priced nearly $743 million of taxable Chicago general obligation bonds with yields topping out at 7.98 percent for debt maturing in 2042. Bonds due in 2023 were priced at par with a 6.361 percent coupon, representing a big spread of 400 basis points over comparable U.S. Treasurys.
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The remaining tax-exempt bonds in the city's $1 billion bond sale, aimed at continuing the restructuring of its short-term debt, will be priced on Thursday.
The city's pension funding problems, including a $20 billion unfunded liability, led Moody's Investors Service earlier this year to drop the city's credit rating to junk. The downgrade triggered $2.2 billion in accelerated debt payments and fees that forced the city to undertake the restructuring.
Meanwhile, the Cook County Board voted to raise its sales tax rate to 1.75 percent from the current 0.75 percent, largely to pay for pensions. The move pushes the total sales tax rate in Chicago to a whopping 10.25 percent, one of the nation's highest.
Cook County Board President Toni Preckwinkle said that she would reassess the need for the tax hike if the state were to enact "meaningful pension reform."
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Retirement benefits for local and state workers are governed by Illinois law and a House committee on Wednesday held a hearing on Governor Bruce Rauner's sweeping reform proposal that includes cost-saving changes for the city and the county, as well as other pension systems state wide.
Rauner Administration officials called the plan "all-encompassing and constitutional," but labor union officials contended it ran counter to protections in the Illinois Constitution against diminishing public worker pension benefits.