October 27, 2006 Overview of State Bond Financing Programs Laura Lockwood-McCall Director, Debt...
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Transcript of October 27, 2006 Overview of State Bond Financing Programs Laura Lockwood-McCall Director, Debt...
October 27, 2006
Overview of State Bond Overview of State Bond Financing ProgramsFinancing Programs
Laura Lockwood-McCall Laura Lockwood-McCall
Director, Debt Management DivisionDirector, Debt Management Division
Office of the Oregon State TreasurerOffice of the Oregon State Treasurer
2
Introduction
Definitions
U.S. Debt Market
General Obligation Credits and Ratings
Oregon’s Bonding Process
Mechanics of a Bond Sale
Oregon’s Long-term Debt Trends
State Debt Ratio Comparisons
3
What is a bond issue?
The process of issuing bonds is the process of borrowing money
Evidence of the issuer’s obligation to repay its debt Pledge of general fund or
specified resource Specified schedule of principal
and interest payments
4
Why do governments issue bonds?
Major source of funding for a jurisdiction’s long-term capital needs
Allows assets to be acquired as needed rather than when enough cash has been saved
Spreads costs of a capital asset over time to all those who benefit from it
Short-term borrowings for smoothing out cash flow imbalances, not as a way to balance the budget!
5
What types of projects are financed with tax-exempt bonds?
Interest on state and local bonds
issued for “governmental
purpose” capital projects are
exempt from both federal and state
taxation
Examples of public projects
include schools, roads, bridges,
city halls, court buildings, sewer
and water facilities
Investors are willing to accept a
significantly lower interest rate due
to the double tax-exemption
offered
6
What is a private activity tax-exempt bond?
Certain “private activity” projects or programs that serve a larger public purpose may also be issued on a tax-exempt basis
Examples include financing of airports, ports, affordable housing, first time homebuyer mortgages, electric power generating facilities, convention centers and sports stadiums
Qualified 501(c)(3) organizations can also issue tax-exempt bonds for projects such as educational, health and cultural facilities (including Willamette University!)
7
Treasury**16.4%
Mortgage Related23.3%
Federal Agencies10.3%
Money Market13.2%
Asset Backed7.8%
MunicipalSecurities
9.0%
U.S. Corporate20.2%
U.S. Bond Market
Outstanding Bond Market Debt as of September 2005* ($Trillions)
Total: $24.7 Trillion
Source: Bond Market Association * Figures may not add due to rounding** Includes interest bearing marketable public debt only
$5.0T
$3.2T$2.5T
$1.9T
$2.2T
4.0T
$5.7T
8
U.S. Municipal Bond Market
Mutual Funds
14.3%
Money Mkts15.2%
Closed-End Funds
4.2%
Commercial Banks7.0%
Prop. & Casualty
Insurance13.2%
Other**7.9%
Households34.6%
Owners of U.S. Municipal Securities as of June 30, 2005* ($ Billions)
Total: $2.1 Trillion
Source: Bond Market Association*Figures may not add due to rounding** Includes non-financial corporations, state and local government general funds & retirement funds, savings institutions, life insurance companies, private pension funds, brokers/dealers, etc.
$815B
$304B
$323B
$90B
$141B
$281B
$168B
9
What is a bond credit rating?
Credit ratings provide investors with an easily identifiable way to assess the degree of risk in an issuer’s securities
Three major firms in municipal market Standard and Poor’s Moody’s Investors Service Fitch Investors Service
Different rating schemes, but same underlying theme: AAA for highest rated securities AA, A, BBB levels as perceived risk increases BBB- is below investment grade
10
What factors are considered by the credit rating agencies?
General Obligation Bonds Financial performance of jurisdiction Governance Framework/Management Practices Debt burden Economic base
Revenue Bond All of the above, plus Strength of specific revenue streams pledged Legal, financial agreements Rate covenants
11
Recent Oregon G.O. Bond Rating History
Moody’s S&P Fitch1990 Aa (January) AA- AA (September)1991 Aa AA- AA1992 Aa AA- AA1993 Aa AA- AA1994 Aa AA- AA1995 Aa AA- AA1996 Aa AA (September) AA1997 Aa2 (April) AA AA1998 Aa2 AA AA1999 Aa2 AA AA2000 Aa2 AA AA2001 Aa2 AA AA2002 Aa2 AA AA2003 Aa3 (February) AA- (October) A+ (February)2004 Aa3 AA- A+2005 Aa3 AA- AA- (April)2006 Aa3 AA- AA-
12
Legal Authority for State General Obligation Bond Programs
Oregon Constitution provides authority to issue general obligation (“GO”) bonds
Separate GO bond programs are created by constitutional amendments approved by State voters
The State unconditionally promises to pay debt service over the life of each GO issue from any legally available revenues
Debt limits linked to real market value (RMV) of property in the State
e.g., Higher Education (XI-G) Bonds 0.75% RMV = $ 2.48 B authorized Only $170 M in XI-G debt outstanding
Numerous other GO bond authorizations, each with hefty debt limits
More practical limits on outstanding debt established by State Debt Capacity Advisory Commission (SDPAC)
General Fund debt service as % of General Fund Revenues (5% max target)
13
Oregon’s Bond Authorization Process
Oregon has disciplined debt management policies and procedures
Biennial budget process requires legislative authorization for all new bond issuances during a biennium (“bond bill”)
General obligation bonding programs currently focused on capital needs of higher education, community colleges
Revenue bond programs are created by statute that authorizes State agencies to pledge specific revenue streams for debt repayment
Appropriation credits generally used for funding construction of state prisons, other state office capital needs
Governor
Budget & Bonding Proposal
Legislature
Considers & Approves Budget
& Bonding Proposal
State Treasurer
Issues State Bonds on behalf of State
Agencies
State Agencies
Manage Bond Programs
State Debt Policy Advisory
Commission
14 17
Program
Amount Outstanding
(MM) Use of Funds
Main Source of
Repayment
Backup Source
of Repayment
Uninsured
Ratings 1
Board of Higher Education
$830 Higher education facilities
User charges, student building fees, gifts,
grants and legislative appropriati ons
State general obligation
M: Aa3 S: AA-
F: AA-
TANs $148 State cash flow management
All available revenues of State from taxes not
otherwise pledged
NA M: MIG1
S: SP-1+
F: F1+
COPs $1,040 State offices,
prisons, and equipment
Rent payme nts by the
user State Agencies, via legislative appropriation
NA M: A1
S: A+ F: A+
Appropriation Bonds $386 Restore cash balances during
2001 budget crisis
Legislative appropriation NA M: A1 S: A+
F: A+
Overview of Credits & Programs
____________________(1) “M” indicates Moody’s, “S” indicates Standard and Poor’s and “F” indicates Fitch.
State of Oregon Bond Issuing Entities
15 18
Overview of Credits & Programs
Program
Amount Outstanding
(MM) Use of Funds
Main Source of
Repayment
Backup Source
of Repayment
Uninsured
Ratings 1
Lottery Bonds $600 Economic development and
education
Lottery revenues after prizes and operating
expenses;
Direct appropriations
by Legislature
M: A1
S: AAA
F: A+
Highway User Tax
Revenue Bonds
$529 Restore highways;
$1.5 bn remaining unused authorization
Taxes and fees on fuel
and licenses, after certain expenses and formulaic set -asides; 3x
coverage test
NA M: Aa2/VMIG-1
S: AAA/AA+
F: AA/F-1+
Department of Veterans’ Affairs Bonds
$737 Make subsidized housing loans to military veterans
Pass -thru of mortgage payments
State General Obligation
S: Aa3/VMIG -1 M: AA-/A-1+
F: AA -/F-1+
Single and Multi -Family Housing
Bonds
$1,497 Finance mortg age loans for low -to-
moderate income residents and construction of low
rent housing developements
Pass -thru of mortgage payments
Reserve accounts / FHA
and other insurance proceeds from
mortgages / Lien on properties
Single Family: M: Aa2/VMIG-1
Multi-Fami ly:
Varries deal -to-deal
____________________(1) “M” indicates Moody’s, “S” indicates Standard and Poor’s and “F” indicates Fitch.
Other state agencies with active bond programs include Economic and Community Development Department, Department of Energy, Oregon Facilities Authority, and Department of Environmental Quality.
State of Oregon Bond Issuing Entities
16
Considerations when Selling State of Oregon Bonds
Method of Sale
Competitive vs. negotiated sale of bonds
Size and complexity of transaction
Market conditions
Competitive sales make sense if:
Frequent issuer with well-known credit
Stable interest rate environment
Negotiated sales make sense if:
Infrequent issuer
Dynamic interest rate environment
Complex transactions involving enhanced premarketing efforts
17
Timing of Sales of State Bonds
Authorization requirements
Program spending needs
Federal tax law considerations
State Treasurer’s office manages
overall state bond calendar
Goal -- keeping in-state retail
interest high for each sale
reduces overall interest cost
Helps state avoid pricing bonds
when other large transactions,
economic announcements are
impacting capital markets
Major State Bond Programs
Planned Issuance through
6/30/07
COPs $ 94 M
Lottery Bonds 183 M
Single Family Mortgage Program
300 M
GO Bonds/Veterans Mortgage Program
80 M
GO Bonds/Energy Loans
68 M
GO Bonds/Higher Education & Community Colleges
138 M
ODOT Bonds 350 M
Multifamily Housing Bonds
100 M
Total $ 1,313 M
18
Who are the members of the financing team?
Financial advisor
Bond counsel
Underwriter(s)
Underwriters’ counsel
Trustee
Other consultants and professionals
And most important, the issuer!
19
What should an issuer look for in selecting the financing team?
Expertise in municipal capital markets
Understanding of jurisdiction’s objectives and needs
Experience with similar types of securities
Awareness of innovative financial methods which can reduce costs or provide financial flexibility
Ability to complete your financing on a timely basis
You get what you pay for – lowest cost providers don’t always save you money in the long run!
20
What types of documents are needed to publicly issue bonds?
Official statement
Bond resolution
Trust indenture
Notice of sale
Bond purchase agreement
Continuing disclosure agreement
Tax certificate
21
How does the State ensure bonds are priced fairly in a negotiated sale?
Financial advisors are hired who are independent of underwriters and are knowledgeable about the bond pricing process
Financial advisors monitor capital markets both prior to and after pricing to confirm that bonds are sold to underwriters at market levels Comparable issues also in market Bond market benchmarks
22
Trends in Oregon Bond Issuance
History of Total Obligations Outstanding
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
General Obligation Bonds Direct Revenue Bonds Appropriation Credits• Historically, most general
obligation debt linked to self-supporting Veteran’s Mortgage Bonds
• Growing use of revenue bonds to fund economic development, highways, mortgages for 1st time homebuyers
• Recent State budget crisis led to issuance of $450 M in appropriation deficit bonds and $2B in POBs in 2003
• On the horizon -- $1.9 B authorization for ODOT bridge and road improvements
23
Trends in General Obligation Bond Issuance
History of Outstanding General Obligation Debt
$0
$1
$2
$3
$4
$5
$6
$7
198519861987198819891990199119921993199419951996199719981999200020012002200320042005
In Billions
DVA Bonds All Other GO Debt Pension Obligation Bonds
24
Trends in Appropriation Credits Issuance
History of Outstanding Appropriation Credit
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Millions
Certificates of Participation Appropriation Bonds
25
Trends in Direct Revenue Bond Issuance
History of Outstanding Direct Revenue Bonds
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
SF & MF Mortgage Bonds Lottery Bonds
Highway User Bonds EDD Bond Bank
26
Calculation of Net Tax-Supported and General Fund Debt
Type & PurposeTotal
Gross DebtOutstanding
Net Tax-Supported Debt
General Fund Supported
Debt
General Obligation BondsGeneral Fund Supported
General Purpose Bonds $0 $0 $0Community College Bonds 2,675,000 2,675,000 2,675,000Higher Education Facility (XI-G) Bonds 170,163,993 170,163,993 170,163,993Pollution Control Bonds (85% of Total) 33,528,250 33,528,250 33,528,250DAS Oregon Opportunity Bonds 192,605,000 192,605,000 192,605,000DAS Pension Obligation Bonds (38% of Total)* 791,904,800 791,904,800 791,904,800
Total General Fund Supported $1,190,877,043 $1,190,877,043 $1,190,877,043
Fully Self-SupportingState Highway Bonds $0 $0 $0Veterans' Welfare Bonds 757,690,000 0 0Higher Education Facility (XI-F) Bonds 595,923,724 0 0Pollution Control Bonds (15% of Total) 5,916,750 5,916,750 0Water Resources Bonds 1,356,000 1,356,000 0Elderly & Disabled Housing Bonds 213,580,000 0 0Alternate Energy Project Bonds 133,685,000 0 0DAS Pension Obligation Bonds (62% of Total)* 1,292,055,200 1,292,055,200 0
Total Self-Supporting $3,000,206,674 $1,299,327,950 $0
Total General Obligation Bonds $4,191,083,717 $2,490,204,993 $1,190,877,043
Revenue BondsDirect Revenue Bonds
Lottery Revenue Bond Program(s)** $600,555,000 $600,555,000 $0Highway User Tax I Revenue Bonds 174,500,000 174,500,000 0Highway User Tax II Revenue Bonds 355,085,000 355,085,000 0Transportation Infrastructure Bank 0 0 0Economic Development - Bond Bank 186,335,000 0 0Single-Family & Multi-Family Housing 1,520,641,073 0 0State Fair & Exposition Center Bonds 0 0 0
Total Direct Revenue Bonds $2,837,116,073 $1,130,140,000 $0
Conduit or Pass Through Revenue BondsEconomic & Industrial Development $683,185,401 $0 $0Oregon Facilities Authority 738,324,836 0 0Multi-Family Housing Programs 98,510,785 0 0
Total Conduit or Pass Through Revenue Bonds $1,520,021,022 $0 $0
Appropriation Credits Certificates of Participation (COP's) $1,040,030,000 $1,040,030,000 $1,040,030,000
Oregon Appropriation Bonds 385,865,000 385,865,000 385,865,000Total Appropriation Credits $1,425,895,000 $1,425,895,000 $1,425,895,000
Total Gross Debt $9,974,115,812
Total Debt - Less Conduit Revenue Bonds $8,454,094,790 $5,046,239,993 $2,616,772,043
*To conform to rating agency methodologies Pension Obligation Bonds are considered net tax-supported debt.** Rating agencies recognize that these programs are supported by a dedicated Lottery revenue source.
State of Oregon
Comparison of Total Gross Debt, Net Tax-Supported Debt and General Fund Supported Debtas of December 31, 2005 (all numbers to be updated subsequent to agency verification)
27
State Debt Comparisons
Source: Moody’s State Debt Medians Reports, 1996 - 2005
Recent Trends in Oregon's Net Tax Supported Debt per Capita
$431 $422 $446 $505 $540 $541 $573 $606
$701 $703
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
M oody's M edian Year
Debt per Capita
POB Bonds
Oregon
Median Among 50 States
28
State Debt Comparisons
Source: Moody’s 2003 State Debt Medians
Recent Trends in Oregon's Net Tax Supported Debt as a % of Personal Income
2.1% 2.1%1.9% 2.0%
2.2% 2.1%2.3% 2.2%
2.4% 2.4%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
M oody's M edian Year
Debt as a % of Income
POB Bonds
OregonMedian Among 50 States
29
Where can I get more information on Oregon municipal bonds?
State Treasurer’s Office http://www.ost.state.or.us/divisions/DMD/index.htm Oregon Bond Calendar and Bond Index Oregon Bond Manual State Debt Policy Advisory Commission reports Municipal Debt Advisory Commission reports
GFOAhttp://www.gfoa.org/ An Elected Official’s Guide to Debt Issuance An Elected Official’s Guide to Rating Agency Presentations
OMFOAhttp://www.omfoa.org/ Annual spring conference Northwest Government Institute each fall