One of the biggest targets was pension plans. In dollar amounts, pension bonds flooded the market. Illinois was a standout. It sold an eye-popping $10 billion in pension obligation bonds--the largest 30- year issue ever by a state. Meanwhile, Oregon and Wisconsin turned a hefty $2.8 billion and $1.8 billion, respectively, into pension debt. Wisconsin spent some of its proceeds on sick-leave obligations, something capital finance director Frank Hoadley calls a "big sleeper for many jurisdictions."
All totaled, state and localities issued nearly $385 billion in long- term bonds--the highest total in the past decade. About one-third of it went to pay for new capital projects; the rest of it refinanced existing debt, a ratio similar to 2002. As state revenues continue to stumble along and interest rates remain low, market observers expect to see heavy borrowing again this year, with a large chunk likely to come once more from refinancing--to push maturities out further and to lower repayment costs.
Last year was not only a big year for the muni bond market in terms of issuance, it also saw debt put to a wide variety of end-uses. Arizona borrowed money to build public schools, and St. Paul, Minnesota, to build market-rate housing. Orange County, California, used debt to buy a private toll road, and Memphis used borrowed money to lower its energy bills.
Those four--plus three variations on the pension-bonding theme--stand out as Deals of the Year for 2003.
LESSON PLANS
Arizona School Facilities BoardThanks to a lawsuit brought by poorer school districts, the state of Arizona has, since 1998, shouldered financial responsibility for funding new school construction. Although the state intended to cover the costs on a pay-as-you-go basis, that approach became unrealistic in fiscal 2002, when Arizona, like most other states, fell on hard fiscal times.
Constrained by a general obligation debt limit of $350,000 a year, the state examined its options for borrowing the money to build schools. Issuing certificates of participation in a lease-to-own structure made the most sense. The state's school facilities board created a pool that included nearly 50 schools on a master lease, which is what the COP purchasers bought into. Certificates with a par value of $372 million were sold. School districts leased future school sites to a trustee, which in turn subleased the land to the state's school facilities board, which leased it back to the districts. Districts pay nothing to lease from the board, and the districts are responsible for managing the construction process. Funding, however, comes from the COPs and state appropriations.
"Although everyone was freaking out that 'Some trustee will own my school,' the beauty of it is that it's just a mechanism to let the state raise capital," explains John Arnold, deputy director of finance for the school facilities board. The districts retain control of the school property and operate the schools. Although they signed a lease now, in 15 years when the COPs are paid off, the school districts will have title to their schools.
In a scenario similar to Arizona's, Buffalo, New York, schools last year sold $185 million in insured 20-year lease-backed bonds through the Erie County Industrial Development Agency. The sale was part of a long-term $1 billion plan to renovate and construct buildings.
HEADING HOME
St. Paul, MinnesotaWhen Mayor Randy Kelly promised to build 5,000 units of housing in four years, he handed his planning and economic development staff a gargantuan challenge but a small amount of money. The city was to set aside $5 million annually from its local-option tax toward the effort.
Typically, the city lets the private sector obtain sites, and then talks begin on the housing piece. With a four-year time frame to contend with, the city wasn't sure the private sector could meet the goal. Of course, the city could condemn land, but that might not be the most effective approach.
Instead, the city parlayed the $5 million into a $25 million bond. It did so by pledging the first two years of tax money, plus mortgages on land it wanted to develop, as collateral for the bonds. The borrowed money is going toward purchasing land and putting in infrastructure so that development can follow.
One of the first purchases the city made was a tank farm along the Mississippi River, one of two adjacent sites it had been eyeing for some time as locations for a potential housing project. It spent $3 million on the 30 acres and about $10 million on improvements and infrastructure and condemned the adjacent property to obtain the rest of the land to build homes. Around 1,000 units will be built, including apartment houses, townhouses and conventional single-family homes. About 20 percent will be affordable housing, the rest market- rate. All totaled, the homes will move St. Paul closer to the mayor's goal.
REVERSING COURSE
Orange County, California,Transportation AuthoritySometimes a decision that works well for immediate purposes does less well in the long run. That was the case when California tried to address its perennial need for more roadways.
With public funds lacking and the need for additional highways growing, the California legislature in 1989 tried to spur construction by permitting four privately built and owned toll roads. The first one completed was the 91 Express Lanes, opened in 1995. It was the first privately financed toll road in the United States in more than 50 years and the first fully automated toll facility anywhere.
The 10 miles of four lanes were built in the median of State Route 91, the main freeway between Orange County and Riverside County. Roughly 270,000 cars travel the freeway every day, and the toll lanes offer a chance to save as much as an hour of commuting time at a cost of $5.50.
As traffic volume multiplied, however, the state realized one important limitation: There was a noncompete clause in the deal with California Private Transportation Co., the builder and owner of the toll road until 2030. That meant the public sector was prohibited from making any improvements in the corridor for 11/2 miles on either side of the road for the 30 miles from San Bernardino to Los Angeles County until 2030--a stretch of roadway where commuters were struggling with heavy traffic and around-the-clock congestion.
"There was almost a citizen revolt," says James Kenan, treasurer of the Orange County Transportation Authority, of the county's inability to improve the situation. Riverside County went to court to challenge the constitutionality of the set-up, and last year the state, in essence, forced the toll road owner to sell the road to OCTA. The authority paid $72.5 million in cash and assumed a taxable debt of $135 million. That debt had been financed at a rate of 7.83 percent, which the authority moved to refinance as quickly as it could, ratcheting the rate down to 4.43 percent.
With the noncompete clause no longer a factor, improvements to the freeway can be made--as soon as the money becomes available.
ENERGY SAVER
Memphis Light Gas & WaterOne way for a city to reduce its electric bills is to conserve energy, but there's only so much a government can do to force its employees to turn down the lights and turn up the summer thermostat. Another approach is for a utility to offer a discount for prepayment of utility bills. Last year, the U.S. Internal Revenue Service made that tack more attractive by allowing tax-exempt financing of electricity prepayments. Memphis Light Gas & Water saw an opportunity and jumped on it.
The utility issued $1.5 billion in 15-year bonds to finance a prepayment to the Tennessee Valley Authority for electricity it had already contracted to receive. As a result, MLGW gets a discount on the power purchased via the prepayment transaction for the next 15 years. Savings are estimated at $225 million.
