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CHICAGO, Aug 30 (Reuters) - Illinois bonds traded higher on Friday following a judge's decision preventing a constitutional challenge to $16 billion of the state's debt from proceeding.
In the wake of Thursday's ruling by Sangamon County Circuit Court Associate Judge Jack Davis II, prices rose and yields tumbled on Illinois general obligation bonds sold in 2003 and 2017 that were targeted in a taxpayer petition filed in July.
The release on Thursday of Illinois' fiscal 2018 financial audit, which showed an improvement in the state's still-hefty structural budget deficit, also comforted the U.S. municipal bond market, according to Peter Franks, senior market analyst at Municipal Market Data (MMD).
"The report on the financial condition of the state still isn't rosy, but it's better than it has been," he said.
Because of its deep financial woes, Illinois has the lowest credit ratings and pays the biggest yield penalty among states.
Franks said Illinois' so-called credit spread over MMD's benchmark triple-A yield scale for 10-year bonds will be lowered 10 basis points to 165 basis points on Friday as a result of the trading.
Since the petition's filing, the spread had widened from 139 basis points on July 1 to 175 basis points as of Thursday.
The petition claimed bonds Illinois sold in 2003 and 2017 violated the state constitution because the proceeds boosted funding for state retirement systems or paid overdue bills instead of being used for specific purposes like capital improvements.
Plaintiffs, including John Tillman, CEO of conservative think tank Illinois Policy Institute, had sought the court's permission to file a taxpayer lawsuit against state officials to stop billions of dollars in future payments on the approximately $14.35 billion of bonds that remain outstanding.
In the ruling denying the petition, which Tillman plans to appeal, the judge said the plaintiffs' arguments were more political than legal in nature.
Meanwhile, Illinois reported that it ended fiscal 2018 with a $7.8 billion general fund budget deficit, an improvement of nearly 50% from the state's record $14.6 billion gap in fiscal 2017. (Reporting by Karen Pierog in Chicago Editing by Matthew Lewis)