CHICAGO — Iowa would issue $130 million of revenue bonds for a new prison and about $200 million of tobacco bonds under proposals contained in Gov. Chet Culver’s $6.4 billion fiscal 2009 budget unveiled this week.
The state in 2005 sold $800 million of new-money and refunding bonds secured by a portion of its $1.8 billion share of the 1998 Master Settlement Agreement between most states and the major tobacco companies. The deal restructured the state’s $650 million 2001 sale, leaving the state with $1.4 billion of outstanding tobacco bonds.
Iowa’s outstanding tobacco debt securitizes about 78% of the total state settlement, leaving room for additional issuance, estimated to be $200 million, according to a state budget official. “We are looking at our options and at the market and may have to tweak the structure,” the official said.
Interest rates and investor appeal in the tobacco sector also will affect the deal’s timing and whether the state moves forward in the coming fiscal year that begins July 1. Proceeds would finance proposals to modernize correctional facilities and other infrastructure projects.
In addition to the tobacco sale, the budget includes an appropriation to issue about $130 million of bonds for the construction of a new penitentiary. The debt — which might not be issued for several years — would be secured and repaid with the various court fines and penalties the state collects. Iowa has $54 million of outstanding bonds backed by those fines.
The budget would boost the state’s budget reserves to a combined $646 million, including $485 million in cash reserves and $161 million in its rainy-day fund, from $534 million held at the close of fiscal 2007 and $592 million expected at the close of the current fiscal year.
Culver touted the increasing reserves as an example of the state’s improved fiscal condition in his state address Tuesday evening.
“I believe our goals this session are simple — protect our priorities, balance the budget, and address some unmet needs,” he said. “Our budget must reflect our commitment to protect the new initiatives we launched last session.”
The overall budget is up about 6% from the fiscal 2008 proposal passed by the Democrat-controlled Legislature last year. Culver, also a Democrat, has proposed raising about $75 million of new revenue in his second budget by closing a corporate tax loophole on companies that do business in the state but don’t pay income taxes. Another $20 million would come from an increase in the deposit and taxes on the purchase of cans and bottles.
“It’s a tight budget and agency heads were asked to submit status quo budgets,” a budget official said.
The state also anticipates entering the market next year with its annual cash-flow issue. Iowa late last year sold $500 million of tax and revenue anticipation notes.
As the state doesn’t issue stand-alone general obligation bonds, it carries an Aa1 issuer rating from Moody’s Investors Service. The implied GO rating from Fitch Ratings and Standard & Poor’s is AA-plus.
Iowa’s challenges include its past use of one-time revenue streams to cover expenses and an economy that lags the nation in the area of personal income growth.
Revenues grew by 6.4% in fiscal 2007 resulting in a $262 million budget surplus, and they are expected to grow by another 6.9% in the current fiscal year, with more modest growth of 2.9% expected in fiscal 2009.
A legislative analysis of the proposed budget warned that current revenue estimates show the state faces a $350 million funding gap in the next fiscal year. The state’s pension plan is funded at an 84% ratio and it has reported an unfunded liability for other post-employment benefits of only about $219 million.
