Civic Federation Debt and Infrastructure Committee October 24, 2012

1. State of Illinois Civic Federation Debt and Infrastructure CommitteeOctober 24, 2012 0

2. Disclaimer This Presentation does not constitute a recommendation or an offer or solicitation for the purchase or sale of any security or other financial instrument, including Bonds, or to adopt any investment strategy. Any offer or solicitation with respect to such Bonds will be made solely by means of a Final Official Statement, which describes the actual terms of any such Bonds. You should consult with your own advisors as to such matters and the consequences of the purchase and ownership of such Bonds. No assurance can be given that any transaction mentioned herein could in fact be executed. Past performance is not indicative of future returns, which will vary. Transactions involving such Bonds may not be suitable for all investors. You should consult with your own advisors as to the suitability of the Bonds for your particular circumstances. This Presentation contains forecasts, projections, and estimates that are based on current expectations but are not intended as representations of fact or guarantees of results. If and when included in this Investor Presentation, the words “expects,” “forecasts,” “projects,” “intends,” “anticipates,” “estimates,” and analogous expressions are intended to identify forward looking statements as defined in the Securities Act of 1933, as amended, and any such statements inherently are subject to a variety of risks and uncertainties, which could cause actual results to differ materially from those contemplated in such forward looking statements. These forward looking statements speak only as of the date of this Investor Presentation. The State disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statement contained herein to reflect any change in the State’s expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

3. www.capitalmarkets.illinois.gov Website for State of Illinois Bond Information

4. www.capitalmarkets.illinois.gov

5. www.capitalmarkets.illinois.gov

6. www.capitalmarkets.illinois.gov

7. State of Illinois: Economic Overview 6

8. Breadth and Depth of Illinois’ Economy • Economy1 • GDP: $670.7 billion • 5th largest economy in U.S. accounting for 4.48% of national economic output1 • Demographics2 • Population: 12.9 million, 5th most populous state Illinois Economy Compared to Largest States1 ($’s in billions) U.S’s 5th Largest Economy • Deep and Diverse Economy • Financial Activities, Manufacturing, Trade, Transportation and Utilities, Leisure and Hospitality, Education and Health Services, Mining and Logging, Information and Other Services, Government, Professional Services, and Construction Non-Farm Payroll Jobs by Industry3 1 Source: Bureau of U.S. Department of Commerce – Bureau of Economic Analysis, GDP by State, 2011 2Source: U.S. Census Bureau, 2011 Census Data. http://quickfacts.census.gov/qfd/states/17000.html 3Source: Bureau of Labor Statistics, June 2012; http://www.bls.gov/eag/eag.il.htm, http://www.bls.gov/news.release/empsit.t17.htm.

9. City of Chicago is Economic Hub of the Midwest • Financial Center: Chicago Board of Trade, Chicago Board Options Exchange, Chicago Stock Exchange, Chicago Mercantile Exchange • Major transportation Hub: Only U.S. city where all 6 major U.S. and Canadian Class I railroads converge to interchange freight, home of two major airports including, O’Hare International Airport, 4th busiest airport in the world • Corporate headquarters to 31 Fortune 500 companies1 • Access to International Markets • 1,584 foreign firms with 5,729 locations in the State • International employers provide approximately 287,039 jobs • Direct exports account for 7.7% of State GDP in 2010 • Center for global distribution, with the 3rd largest intermodal port in the world • Diverse exports include: Agricultural Products, Oil And Gas, Minerals And Ores, Forestry Products, Livestock And Livestock Products, Prepackaged Software, and Fish Products, among numerous other manufactured goods. National and International Economic Hub 8 Annual Exports by Top Ranked U.S. States2 Illinois home of many fortune 500 companies’ HQ 1 Source: Illinois Department of Commerce and Economic Opportunity. http://www.ildceo.net/NR/rdonlyres/80F50180-8E4F-473B-9BB9-D122F7D6A749/0/Fortune500_2011.pdf; 2 Source: WISERTrade at HCC: State Exports by NAICS Database, 2011; https://www.wisertrade.org/naics/ftbegin.

10. State of Illinois: Debt Profile and Bondholder Security 9

11. Credit History and Security for State General Obligation Bonds • History1 • Issuer of General Obligation debt since the early 1900’s • Perfect repayment history • Amount Outstanding2 • $27.5 billion of outstanding G.O. debt • 100% of the amount outstanding is fixed-rate3 • Debt Service Structure2 • Maximum annual debt service is approximately $3.1 billion • Weighted Average debt maturity of 10.6 years • G.O. Pledge • G.O. bonds are secured by the full faith and credit of the State • This is the strongest security the State can provide investors for the repayment of debt service • No Bankruptcy • Under current US law, no state can file for bankruptcy4 Orland Park Quincy Springfield Mt. Vernon 1 Source: Illinois Historic Preservation Society, http://www.state.ilus/hpa/ilchronology.htm. Perfect repayment history from various publications and the Governor’s Office of Management and Budget. 2 Source: Official Statement Series September 2012; Includes all General Fund supported debt. 3 Source: $600 million of total debt outstanding is synthetic fixed. 4 Source: Chapter 9 of US Bankruptcy code is only available to municipalities and political subdivisions, not States themselves.

12. General Obligation Bond Act • Advance set-aside of debt service funds • Dedicated account maintains significant balances in General Obligation Bond Retirement and Interest (GOBRI) Fund. • Debt service requirements are deposited on a monthly basis into GOBRI. • The obligation to pay is not limited to any particular source of funds and the State has unlimited taxing powers. • The State can draw from all State funds in the State treasury if needed to pay debt service on GO bonds. • GOBRI Mechanics • Set aside includes 1/12th of the next 12 months of principal amortization and 1/6th of the next 6 months of interest. • Reserved over the course of the month and transferred on the last day of the month. • Protection under Illinois Constitution and State laws • State law explicitly provides bondholders the remedy to sue the State to compel payment and to satisfy the State’s bond obligations. • The Illinois Constitution contains a “non-impairment” clause that prohibits action by the General Assembly that would, under contract law, impair the obligations of a contract between the State and its bondholders. • Illinois' issuance of debt requires a supermajority vote (60%) of both houses of the legislature, except for constitutionally permitted short-term borrowings, refunding issues and revenue bonds.2 Fiscal Year End Cash Balances1 ($ in millions) • The General Obligation Bond Act provides an irrevocable and continuing appropriation to pay debt service and an irrevocable and continuing authority for and direction to the Treasurer and Comptroller, as directed by the Governor, to make the necessary pre-funding transfers into GOBRI from any revenue or fund of the State. 1Source: State of Illinois Governor’s Office of Management and Budget. 2 Source: State of Illinois Constitution.

13. No ability to do “scoop and toss”* financing • Article IX, Section 9, clause (e) of the Illinois Constitution: • “State debt may be incurred by law to refund outstanding State debt if the refunding debt matures within the term of the outstanding State debt.” • Similar restrictions are contained in the General Obligation Bond Act (30-ILCS-330) which governs the issuance of general obligation debt by the State. • “Economic refundings” are allowed but “scoop and toss” refundings are prohibited. • Protects bondholders against the creation of refinancing risk in outlying years. *”Scoop and Toss” financing is the technique of repaying current maturities of debt through the issuance of new longer maturity bonds.

14. Budget and Budgetary/Accounting Process

15. Budgetary Process: • Three-Year Budget Forecast is required to be submitted by the Governor to the General Assembly by the first week of January each year • The Governor proposes the budget in February based upon estimates of revenues, expenditures, and his policy proposals (the “Governor’s Budget”) • The Current Year Budget is revised in January each year and is released with Governor’s Budget • Budget requires a simple majority legislative approval (House of Representatives and Senate) prior to June 1stand must be balanced when adopted • If Budget is not approved by both chambers of the Illinois General Assembly before June 1st of each year it requires a 3/5 legislative approval (House of Representatives and Senate) • Debt authorization requires a 3/5 legislative approval (House of Representatives and Senate) • The Governor’s Budget is required by legislation passed in 2011 to use the “Budgeting for Outcomes” process • FY2012 and FY2013 Budgets were the first developed using this process • Commencing with FY2012, State Comptroller must publish Comprehensive Annual Financial Report for each Fiscal Year by December 31 of each year or publish unaudited financials with a written explanation to State leadership explaining the reasons for the delay (P.A.97-408)

16. Budgeting for Outcomes: For the first time in its history of the State of Illinois, money will be budgeted based on how effectively programs provide results that citizens value, rather than being based on the money allocated in the previous fiscal year. Budgeting for Outcomes is a four-step process: Establish goals Allocate resources Monitor performance Evaluate outcomes • Development of statewide prioritized goals for the fiscal year. • Implementation of online surveys to gather citizen input about the budget, the requirement for three-year fiscal projections and the requirement to compare actual accomplishments with department objectives. • Establishing more effective control of government grants, contracts and leasing. • Development of the robust performance monitoring and performance evaluation capability.

17. FY2013-FY2015 Three Year Projections • Notes: • Mandated by Statute • Released by first week of January each year • First glance at the budget “thoughts” for the upcoming budget • Not updated after release

18. FY2013 – FY2015 Summary Three Year Budget Projections As released January 3, 2012. May not add due to rounding.

19. FY2013 Budget • Notes: • The following table is for discussion purposes only. • Please refer to the Official Statement for the $50,000,000 General Obligation Bonds Series of September 2012 for a complete set of footnotes and disclosures relating to the tables that follow. • Actions anticipated by the General Assembly during the November and December sessions are expected to reduce the net surplus shown in the following tables. Please refer to the Official Statement for the $50,000,000 General Obligation Bonds Series of September 2012 narrative pages 19-22 for additional discussion and details.

20. Summary FY2013 Budget:

21. Agency Expenditures vs Pension Contributions Note: Net Agency Expenditures does not include cost of Group Health and Transfers Out. $ in billions. Source: State of Illinois Enacted Budget FY2013, A Review of the Operating Budget for the Current Fiscal Year, October 8, 2013, The Institute For Illinois’ Fiscal Stability at the Civic Federation

22. State of Illinois: The Will to Govern 21

23. Legislative Action Statutory Spending Limitation2 Revenue Enhancement – $7 billion expected annual impact1 • Appropriations allowed to grow by no more than 2% per year over base year of 2012 • Enacts spending limitations of: $36.8 billion 2012; $37.6 billion in 2013; $38.3 billion in 2014; and $39.1 billion in 2015 • Given projected growth in medical and pension expenditures, spending limitations will require reductions in other areas • Medicaid Reform • Major Medicaid reform3 • $1.7 billion in program savings • $700-$1 billion in new revenues. • Repayment of up to $1 billion of past due bills • Phase out of Section 25 for Medicaid • Personal Income Tax - $6 billion • Personal Income Tax rate increased to 5% effective January 1, 2011 from the current level of 3% • Rate declines on January 1, 2015 to 3.75% and on January 1, 2025 rates decline to 3.25% • Corporate Income Tax - $770 million • Corporate Income Tax rate increased to 7% effective January 1, 2011 from the current level of 4.8% • Rate declines on January 1, 2015 to 5.25% and 4.8% on January 1, 2025 • Suspension of Net Operating Carry Forward - $100 million • Re-established Tax on Inheritance - $182 million Pension Reform Budget Management • Established a “two-tier” benefit system with limitations on benefits for future employees4 • Increased the minimum age at which an active employee may retire with unreduced benefits to 674 • Caped the salary on which a pension may be calculated at $106,8004 • Approved by a strong bi-partisan vote • Created cost sharing for retiree health plan6 • Budgeting for Results5 • Starts with specific revenue levels and prioritizes spending based on importance of program • Allocates revenue dollars in order of priority and level of outcomes until revenues are fully allocated • Programs that are cost ineffective or low in priority may be eliminated • Creation of Backlog Payment Fund7 1 Source: Official Statement Series September 2012, P.A. 96-1496 2 Source: Official Statement Series September 2012, P.A. 96-1496 3 Source: Official Statement Series September 2012,P.A. 97-689, 97-688, 97-691 and 97-732 4 Source: Official Statement Series September 2012, P.A. 96-889 5Source: Official Statement Series September 2012, P.A. 96-958 6 Source: Official Statement Series September 2012, P.A. 97-695 7 Source: Official Statement Series September 2012. P.A..97-685

24. Illinois Jobs Now!: Largest Public Works Program in State’s History 23 Illinois Jobs Now!, a $31 billion six year capital improvement program, has helped Illinois on its path to recovery by leveraging new State revenues with over $3.7 billion in American Recovery & Reinvestment Act funds. • Program Overview1 • $14.3 billion for roads and bridges • $7 billion for developing a 21st century transportation network • $5.1 billion for education • $3.8 billion for economic development and environmental projects • Bonds Issued to Date: • $6,023,667,000 through both General Obligation and Build Illinois Bonds • Bond market has been receptive to bond sales for IJN projects. • Accomplishments To Date • An estimated 100,000 jobs created since January 2010 • Improved 5,948 miles of highway and 842 bridges • More than 400 schools built or renovated 1Individual program elements figures do not sum to $31 billion due to rounding

25. State of Illinois: Conclusion 24

26. Conclusion • Does the State of Illinois have the economic engine to support its bond issues? • YES! • Illinois has a strong economic base that mirrors the national economy • Illinois is one of the world’s largest, most diverse economies • Illinois is a sovereign state with unlimited taxing powers • Are these bonds supported by statute and structure? • YES! • The General Obligation bonds are the strongest security the State can issue • Sources of repayment are not limited to any one revenue stream • The State, by statute, can draw from any and all funds in the treasury to pay debt service • Statutory set aside provisions ensure that general fund revenues are deposited on a monthly basis in a dedicated fund for debt service • Does the State have the “Will to Govern” needed to address its challenges? • YES! • The active, ongoing dialogue between the Executive and Legislative branches of State government demonstrate that there is “will” to work through the political process • Passed the first Capital Bill in over a decade • Passed pension system reforms • Passed significant changes in the way the State will execute its budgets going forward • Passed the first income tax increase in decades • Passed major Medicaid reform expected to reduce GRF expenditures by $2.7 billion • Put in place spending meaningful spending limitations

27. Questions?

28. State of Illinois Civic Federation Debt and Infrastructure CommitteeOctober 24, 2012 27