Illinois Tollway Authority Issues Recovery Bond

By Kevin Robinson in News on May 13, 2009 4:40PM

The Illinois Tollway Authority announced last week that it is issuing a $500 million bond to pay for on-going rehab work, a $6.3 billion program now in its fifth year. The bond issue is one of the first Build America Bonds in Illinois, the result of a provision in the American Recovery and Reinvestment Act, which includes a federal tax-credit to states and municipalities to issue taxable bonds. The deal, which is still being finalized, will issue $400 million in taxable Series A Build America Bonds, and $100 million of Series B tax-exempt bonds. Both bonds mature in 2034.

The taxable bond market is lucrative for governments because it represents a much larger bond market, with institutions and foreign investors making larger deals for bigger buys. In a nutshell, the federal government gives the local government a thirty five percent tax credit toward the bond, allowing them to issue a taxable bond at a higher interest rate than a tax-exempt bond. Byzantine bond regulations have created a situation where tax-exempt bonds generally pay more in interest to the holder. In this case, the federal government views this as a more efficient bond mechanism because it will recoup the tax credit through federal income tax payed on the taxable bond. By subsidizing state and municipal bond issues on the taxable bond market, the federal government get its money back, the local government gets significant funding for recovery projects, and both get access to a much broader bond market. The bonds are tentatively set to mature serially from 2010 to 2025, with term bonds expected in 2029 and 2039.