Demand high for Illinois bonds despite woes Illinois is not paying some of its bills, but it can still raise money in the capital markets. Investors actually lined up to buy bonds issued by the state in a sale on Tuesday, in spite of Illinois" well-documented financial problems. The state sold $575m of bonds, an increase from the $500m originally planned. John Sinsheimer, Illinois" debt manager, told the FT that investors put in orders for $2.3bn of bonds, the best bid-to-cover ratio ever for the state. Illinois had to offer higher rates than on a similar bond offering it made earlier this year, but the interest costs are still historically low. The average interest rate on the latest sale for bonds with maturities ranging from 2013 to 2027 was 4.19 per cent. The bond sale in January fetched an average interest rate of 3.9 per cent, the lowest in the state's recent history. The bond sale comes soon after Pat Quinn, governor, warned that the state faces a "rendezvous with reality" after years of dysfunctional budget habits. To save a system he warned was "on the brink of collapse," Mr Quinn proposed cutting $2.7bn from Illinois" $11.5bn spending on Medicaid. In 2011, Illinois had an $86bn hole in its public pension funds and unpaid bills to service providers. On Monday, Standard & Poor's warned that it could cut the A plus credit rating it gives Illinois by more than one notch if the state makes no progress on realigning its spending and revenues or on addressing its pension liabilities. That follows a downgrade this year from rival credit rating agency Moody's, which cut Illinois by one notch to A2, its lowest rating for any of the 50 US state, on concerns that the state was not taking sufficient steps to fix its financial problems. Illinois pays the highest rates of the 50 US states, according to Thomson Reuters MMD, but US municipal borrowing rates have plummeted to historic lows this year alongside a drop in benchmark US Treasury bonds. In secondary markets, Illinois" 10-year debt trades at a risk premium, or spread, of 152 basis points versus an MMD index of triple A rated 10-year municipal bonds. While investors agree that Illinois needs to work on its finances, they take comfort in the legal and constitutional backing its bonds. Tom Spalding, a portfolio manager at Nuveen Asset Management said: "Illinois still has market access for that reason." He added that the state is "not making a lot of headway in [addressing] their structural budget deficit, but still has a lot of resources to pay the bonds off." According to the state constitution, a classification of public debt called general obligation bonds, the type of debt sold in Tuesday's offering, is backed by "a full faith and credit" pledge of the state, Mr Sinsheimer said. The constitution does not give the same full faith and credit backing to education, public welfare or any other expenditures. "The fact that we have $8bn in unpaid [bills] shows that there are others who have not gotten paid," Mr Sinsheimer said. Under state law, the government also has the power to tap any funds in the state treasury to pay the general obligation debt service, while Illinois also must set aside money on a monthly basis to fund its upcoming debt costs beginning a year before they are due. The bonds sold on Tuesday will fund capital projects, such as improvements to roads, bridges and schools.