Regional News

More MassPike Oversight?

Massachusetts bonding authorities could receive additional oversight on borrowing if Gov. Deval Patrick signs legislation granting the state's Finance Advisory Board increased supervisory powers, an initiative that also includes extending its state appropriation pledge to $800 million of Massachusetts Turnpike Authority debt.

If the legislation becomes law, all state authorities and agencies that issue debt, including the MassPike, would be required to submit biannual reports detailing their borrowing practices to the FAB, a five-member committee within the state's Office of Administration and Finance. Treasurer Timothy Cahill sits on the panel along with four members appointed by the governor.

The measure stipulates that the authorities must detail all non-fixed rate bonding for the six months prior and include all transactions that involve derivatives with the terms and conditions of such agreements. The parties involved in the transactions, copies of agreements, interest rates and payments, and "a written rationale for the determination to enter into any such transaction," must also be included, according to the legislation.

While Cahill approves of increased transparency between the state and its bonding entities, he said the exact ramifications of requiring authorities to submit biannual bonding reports remains to be seen.

"We're not sure exactly what that means yet and we're analyzing that," Cahill said. "It may include the Treasury Department as well, so we don't understand exactly what it means. Technically the FAB is nothing more than an advisory board that hasn't done anything over the past 30 years ... We're certainly in favor of more oversight for the agencies, for the authorities."

The proposal to have state agencies file borrowing details stems from an initiative within the same bill that, if Patrick signs, would allow Massachusetts to extend its state appropriation pledge to $800 million of fixed-rate MassPike debt as the authority prepares to refund the bonds into variable rate to better match the debt with five floating-to-fixed-rate swaptions with UBS Securities LLC as counterparty.

Lawmakers included FAB's proposed increased supervision and the initiative to offer the state's pledge onto MassPike debt within a $2.5 billion general bond bill that will help finance public buildings and other capital projects throughout the Massachusetts.

Using the state's appropriation guarantee, which is one notch below its double-A general obligation rating instead of MassPike's triple-B credit ratings, will help the authority when it restructures Series 1997A fixed-rate bonds for $207.6 million and Series 1997B fixed-rate bonds for $126.7 million into variable-rate debt.

UBS has exercised its rights on the swaptions attached to the bonds, costing the authority $2.35 million of additional interest costs as MassPike pays UBS a fixed rate on the bonds, along with a fixed rate of 4.75%, 4.875%, and 5% to UBS on three separate swaptions while receiving in return 68% of one-month of the London Interbank Offered Rate.

MassPike spokesman Mac Daniels said the authority has yet to pin down a sale date for those bonds, but officials are planning on refinancing the debt before the end of the calendar year. Citi will price the bonds. Public Financial Management Inc. is financial adviser and bond counsel is Edwards, Angell, Palmer & Dodge LLP.

In addition, the legislation allows the authority to use the state's appropriation pledge on $465 million of fixed-rate 1999 Series A bonds on or after Oct. 1. On those 1999 bonds, MassPike pays a fixed rate on the debt, along with a fixed rate of 4.75% and 5% on the two swaptions attached to the debt while receiving from UBS 68% of one month Libor.

Interest costs on the entire $800 million of fixed-rate debt attached to the five UBS swaptions will jump to $2 million per month beginning Jan. 1, unless the authority refinances those bonds into variable-rate debt.

Along with the use of its state-appropriation pledge, the legislation allows the authority to use the commonwealth's general obligation guarantee on the UBS swaptions. Ambac Assurance Corp. insures the derivatives, yet MassPike will be forced to pay nearly $180 million to UBS if the monoline's credit rating falls to single-A.

Moody's Investors Service rates the insurer Aa3 with a negative outlook while Standard & Poor's assigns its AA rating with a negative watch to Ambac. Fitch Ratings recently withdrew its rating on Ambac.

Having the state extend its guarantees could help MassPike in the short-term as it addresses the mounting interest costs, yet officials are looking to repair the authority's fiscal health. Officials are working on cost-saving initiatives to fill a $70 million to $100 million deficit for the current fiscal year, which began July 1, and the bill includes the formation of a special task force to analyze MassPike's finances and present suggestions to create long-term fiscal stability.

That committee will consist of nine members: Cahill, state auditor A. Joseph DeNucci, Secretary of Administration and Finance Leslie Kirwan, Secretary of Transportation and Public Works Bernard Cohen, MassPike executive director Alan LeBovidge, and four additional members to be appointed by the governor. Cohen will chair the task force, which will meet on or before Oct. 1 and file a preliminary report 60 days thereafter. By June 30, the committee will submit its final report.



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