Critics of Massachusetts Gov. Deval Patrick's proposal to have the state extend its double-A credit rating to $2.2 billion of Massachusetts Turnpike Authority debt say the administration should look toward reforming MassPike and creating greater transparency before adding more debt on top of the commonwealth's $29 billion of outstanding debt.
State Treasurer Timothy Cahill and Sen. Mark Montigny, D-Second Bristol and Plymouth, who co-heads the Joint Committee on Bonding, Capital Expenditures, and State Assets, said lawmakers and state officials should debate the idea of allowing MassPike to use the state's double-A rating as it looks toward refinancing previous debt before signing off on the proposal.
Before the state extends any help, Cahill and Montigny said that MassPike needs to become more fiscally efficient and transparent. The authority is currently facing a $70 million to $100 million deficit for fiscal 2009, which began July 1.
"What concerns me the most is that there is no proposal to reform the agency," Cahill said.
One criticism of Patrick's plan is that the administration added the general obligation-extension proposal as an amendment to a $3 billion bond bill for bridge repair. Montigny's bonding committee held a public meeting on the initiative after the House gave its initial passage two days before.
"The last thing I'm going to do is just say, 'OK, we'll pledge this full faith and credit without any reforms or proper transparency and reporting language.'" Montigny said. "I'll do everything I can to stop this from being done this way."
The measure now sits with the Senate Committee on Ways and Means, which has yet to schedule a meeting on the legislation. Lawmakers have until July 31 to pass the $3 billion bond bill, although Patrick can call for a special session to take up the issue.
Using the Commonwealth's GO credit rating as opposed to its own triple-B rating could help the authority as it prepares to refinance about $800 million of fixed-rate debt into variable-rate mode with Citi as underwriter on the transaction. MassPike's executive director, Alan LeBovidge said refunding the $800 million with Massachusetts' double-A rating could save the authority "probably north of 100 basis points at market, but this is all fluid."
Attached to the $800 million of bonds are five floating-to-fixed-rate swaptions with UBS Securities LLC as underwriter that have cost MassPike $2.35 million of additional interest since January because the swaptions do not match the fixed-rate bonds. Officials expect those added interest costs to increase to $2 million per month on Jan. 1, 2009 as UBS has said it will exercise its right on the last two swaptions at that time.
In addition, Ambac Assurance Corp. provides insurance on the five UBS swaptions, yet the authority will be forced to pay nearly $180 million if the monoline's credit rating falls to single-A. Ambac carries a Aa3 rating with a negative outlook from Moody's Investors Service and AA with a negative watch from Standard & Poor's. Fitch Ratings recently withdrew its rating from Ambac.
"That's why we're asking the state to extend coverage of their double-A rating for us because then there would not be a violation of the contract and we wouldn't have to pay [UBS] anything," LeBovidge said. "But, we would obviously try to make it lower."
LeBovidge agrees that there needs to be reforms at MassPike and both Cahill and Montigny mentioned that LeBovidge has implemented good cost-cutting initiatives to the authority since taking office in November.
Along with the calls for reforms to the authority, Cahill stressed that his office was given a 10-minute briefing on the proposal to have the state place another $2.2 billion of debt onto its books. The treasurer said that initiative is larger and more consequential for the state than what was previously raised to him by the administration a few months ago.
"It's clear to us that they do not want to deal with us on this and we can prove that, that they have refused to return phone calls and give us anything more than a six-page power-point presentation that doesn't really get into the meat of the issue," Cahill said. "I mean, one of the pages is actually a definition of a swap."
The treasurer said he was open to the state extending a lessor guarantee - such as a moral obligation or an appropriation pledge - on the $800 million of MassPike debt that is attached to the costly UBS swaptions.
Administration officials did not respond to specific questions but did send a prepared statement via e-mail.
"The governor and the legislature worked together to craft what may be the only responsible and cost-free solution to a serious problem inherited from prior administrations," said Jay Gonzales, assistant secretary for capital finance in the Office of Administration and Finance, in the e-mail. "The Treasurer's office was briefed a week ago on the need to take swift action to protect toll payers from a $175 million payment and did not come forward with any solutions to this pressing problem before the House took action."
Standard & Poor's and Fitch rate the Bay State AA and Moody's assigns its Aa2 rating. On its own, the authority carries A3 and Baa1 ratings from Moody's on its senior and subordinated Metropolitan Highway System bonds, respectively. Fitch rates the $1.3 billion of MHS senior debt BBB-plus and the $968.8 million of subordinated bonds BBB. Standard & Poor's does not rate MassPike.