Arizona Sells $200M for Transportation

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DALLAS - The Arizona Transportation Board expects to market $200 million of revenue bonds today as lawmakers look for ways to trim the state budget while avoiding diversion of highway funds away from transportation projects.

Shifting highway money to pay expenses of the Department of Public Safety's highway patrol division is one of several options the Legislature is considering to solve a projected $2 billion budget shortfall for the upcoming fiscal year that begins July 1.

While highway revenues amply cover debt service on the upcoming senior-lien bonds and $1.7 billion of existing Transportation Board debt, a diversion of revenues was identified as one potential risk factor by Moody's Investors Service.

Despite the state's economic woes, Moody's maintained its Aa1 rating on the board's $1.2 billion of senior-lien debt and Aa2 on $497 million of subordinate-lien debt.

"The Aa1 rating reflects the bonds' first-lien pledge of highway-related revenues allocated by statute to the state highway fund that have demonstrated long-term growth and relative stability, though in recent years have been negatively affected by diversions to the state general fund," Moody's analysts wrote.

"The rating also reflects historically strong coverage of debt service by pledged revenues, an additional bonds test of four times maximum annual debt service, and Moody's expectation that the state will maintain a high level of revenue allocated to the state highway fund resulting in continued high debt service coverage levels in the future."

Pledged revenues include motor fuel taxes, vehicle registration fees, and vehicle license taxes.

Standard & Poor's has an even higher opinion of the debt, conferring its AAA with a stable outlook.

"The lack of a debt service reserve and a statutory distribution formula for pledged revenues is mitigated by covenants not to impair debt service, the historical maintenance of very strong coverage, and only minor historical diversions of highway-user fund money for other prior purposes, including state general fund relief, state highway patrol appropriations, and various other transportation-related purposes," Standard & Poor's analysts wrote in their report.

Fitch Ratings does not rate the debt.

Citi will be lead underwriter on the negotiated deal, with JPMorgan, Goldman, Sachs & Co., UBS Securities LLC, and Peacock, Hislop, Staley & Given Inc. as co-managers.

Bond counsel is Squire, Sanders & Dempsey.

Proceeds will be used for road construction in the Maricopa County area.

The fixed-rate debt will carry maturities ranging from 2023 to 2033.

Legislation enacted last year extended the maximum term of highway revenue bonds to 30 years from 20 years.

"While a 20-year maximum maturity is the norm for state road bonds, extension to 30 years would result in greater leveraging of revenues," Moody's noted. "However, such an extension would not likely result in a significant weakening of the bond program."

The high ratings for the bonds should translate to strong demand, even in a volatile market, according to Timothy Tait, spokesman for the Arizona Department of Transportation, which carries out programs under the direction of the Transportation Board.

"Generally, we would expect high demand, based on previous experience," Tait said. "We expect the investors to be primarily institutional."

The board is expected to issue up to $550 million of new bonds through 2012 as it seeks to keep up with demand. Despite the housing slump and credit crisis, Arizona continues to grow.

"Depending on whose surveys you read, we're either the number-one or number-two state in the country in growth rate," Tait said. "And the need for transportation is growing at an incredible rate."

With a population of 6.3 million, Arizona's growth slowed to 2% in 2007 from an annual rate of 3% in the three previous years. Much of the growth has come from Southern Californians seeking Arizona's relatively cheap land and housing. That led to a housing bubble that has now popped, causing declines in revenue forecasts.

The S&P/Case-Shiller national housing index composite indicated a 9% year-over-year decline in the national median sales price for existing single-family residences last December. The index for the Phoenix market declined by 15% over the same period. A February 2008 report released by RealtyTrac indicated that Phoenix metropolitan area foreclosures rose by 177% in calendar 2007 from the previous year.

Highway user revenues grew 17.2% between fiscal years 2004 and 2007 as the state's population surged. In fiscal 2007, highway user revenue fund deposits increased 3.8%, and transfers to the pledged state highway fund increased 8.2% as the government trimmed transfers to public safety.

An updated forecast showed highway user fund revenues dropping 1.6%, or $40 million, for 2008. Through 2013, revenues are expected to fall between $58 million and $80 million annually.

At $2 billion, the budget shortfall for fiscal year 2009 represents 20% of the total budget, the worst shortfall on a percentage basis among the 50 states. Arizona House Appropriations Committee chairman Russell Pearce, R-Mesa, recently warned of "a real train wreck coming."

In covering a $1.2 billion revenue shortfall in the current fiscal year, lawmakers tapped the rainy-day fund and pushed a month's payment for public schools into the next fiscal year. They also shifted cash from several special-purpose funds.

The state still has $200 million in its rainy-day fund, a drop in the bucket compared to its funding needs.

"Arizona certainly has some budget challenges," Tait said. "But we expect that to be resolved in the coming weeks."

 

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