September 7, 2017 / 5:52 PM / 10 months ago

UPDATE 2-Illinois governor agrees to sell bonds to pay off bills

(Adds statement from Illinois comptroller, details on Illinois bond yields)

CHICAGO, Sept 7 (Reuters) - Illinois Governor Bruce Rauner said on Thursday the state will sell $6 billion of bonds to reduce an unpaid bill pile that ballooned to more than $15 billion during an unprecedented two-year budget impasse.

The Democratic-controlled legislature included the general obligation bond authorization in the fiscal 2018 budget it enacted in July over the Republican governor’s vetoes.

But Rauner last month expressed reluctance to tap that authorization despite a push from Illinois Comptroller Susana Mendoza, who contended the move was more cost-effective than having the state keep accruing late bill payment penalties of as much as 12 percent a year.

Acknowledging that the state has been borrowing from its vendors and service providers, the governor said in a statement he will use the bonding authority “because it’s better to have Wall Street carry our debt than Main Street Illinois.”

He added that lawmakers failed to account for additional debt service costs for the new bonds and that his office was looking at spending cuts to make room for annual principal payments of $500 million plus interest.

The authorization limits the bonds’ maturity to 12 years and requires their issuance by Dec. 31.

The structure and timing of the bond issuance is being evaluated, according to Jason Schaumburg, a Rauner spokesman.

“Refinancing our debt at a much lower interest rate - just like any sensible homeowner with a high mortgage rate would do - will provide payment for services rendered to thousands of people across the state and save Illinois taxpayers billions of dollars over the life of the bonds,” Mendoza, a Democrat, said in a statement.

Illinois bonds due in 12 years were yielding 3.82 percent in the U.S. municipal market, according to Municipal Market Data, a unit of Thomson Reuters.

Since Illinois got its first complete budget in two years, along with an income tax increase, and evaded rating downgrades to junk, yields on the state’s bonds have shrunk. The state’s so-called credit spread over MMD’s benchmark triple-A yield scale for bonds due in 10 years narrowed to 177 basis points from a high of 335 basis points in June.

Last month, S&P Global Ratings said the bond sale could help protect Illinois’ BBB-minus credit rating from a downgrade to junk. (Reporting by Karen Pierog; Editing by Matthew Lewis)

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