Regional News

Iowa Sets $600 Million

CHICAGO - Iowa is ready to enter the market next week with $600 million of special obligation bonds to support the new $750 million jobs program proposed by Gov. Chet Culver to jump-start the state's economy and rebuild infrastructure damaged by last year's floods and storms.

Treasurer Michael Fitzgerald's office will hold a retail order period on Monday ahead of the institutional pricing on Tuesday. Iowa is offering two series, one for $387 million of tax-exempt bonds with the remainder of later-maturing term bonds to be sold under the federal stimulus' taxable Build America Bond program. The state will apply for the federal government's direct-pay 35% interest subsidy.

The tax-exempt piece is structured to mature serially between 2011 and 2029 and the BABs are tentatively structured in six term bonds maturing between 2029 and 2034. Call features on the BABs have not yet been finalized, though the preliminary official statement includes tentative provisions for a make-whole call and extraordinary redemption provisions.

Barclays Capital is the senior manager and William Blair & Co. and Bank of America Securities-Merrill Lynch are co-senior managers. Public Financial Management Inc. is the office's financial adviser and Dorsey & Whitney LLP is bond counsel. The state would follow up this month's sale with another $117 million of bonding to finance approved projects next year.

Proceeds of the sale will finance grants to "shovel-ready" sewer, water, and other building projects under the Iowa Jobs Program approved by the legislature this past spring.

"The IJOBS program will create jobs but a big component is the rebuilding of the state's infrastructure. We had many levies and bridges and other infrastructure damaged by crippling floods and storms last year," Fitzgerald said.

Culver unveiled the program early this year, and some lawmakers initially expressed skepticism over how much the state could afford to borrow. Ultimately, the Democratic legislative leadership and the Democratic governor agreed to a compromise package that limited the level of borrowing earmarked for road and bridge projects to $100 million.

The governor initially wanted $250 million. Instead the additional funding is going towards flood and storm recovery projects. Local governments - like Iowa City, Coralville, and Cedar Rapids - are depending on state revenues as they continue to recover from the devastating floods of last spring.

The bonds being issued next week are secured by gaming revenue and carry a backup pledge of liquor taxes. The secondary pledge is needed as voters weigh in on the continuation of state gaming every eight years.

The next election is in November 2010. The state will also tack on a moral obligation pledge. The $117 million transaction planned for next summer will be secured by an appropriation pledge.

"We received strong double-A ratings as we hoped with the various pledges," Fitzgerald said.

Iowa does not issue stand-alone GOs, but it carries a Aa1 issuer rating from Moody's Investors Service, an implied GO rating of AA-plus from Fitch Ratings, and a AAA from Standard & Poor's. The new special obligation bonds received a Aa3 from Moody's and a AA from Standard & Poor's. Fitch was not asked for a published rating.

The credit's underlying strength comes from the state's moral obligation pledge to cover any shortage in the debt service reserve fund in the event pledged gaming or liquor revenues fall short and the importance of the program to both the governor and the legislature, according to Moody's.

Iowa also tapped gaming revenues and attached its moral obligation pledge to its last major infrastructure program established in 2001, known as Vision Iowa.

The state is pledging $55 million of the $280 million in gaming taxes collected annually at its riverboats, horse racetracks and dog racetracks. If gaming revenue ever fall short of debt service payments, beer and liquor tax revenues can be tapped.

Gaming revenues have grown at a swift clip in recent years, rising from $182 million in 2003 to $280 million in fiscal 2008. Beer and liquor tax revenue totaled $223 million in fiscal 2008, including $85 million in profits that went to the general fund after various costs were covered. Pledged revenues provide three times maximum annual debt service coverage.

Factors that offset some of the credit's strengths include the risk posed to gaming and liquor taxes by the recession and the state's decision not to require an additional bonds test. The BAB program is also a new one and payment of debt service during the capitalized interest period on the BABs relies on the state receiving the subsidy.

"If payment of the federal interest subsidy is not made prior to the debt service due date, the trustee is authorized to utilize the debt service reserve fund, which will be funded at the time of issuance in an amount equal to net debt service," Moody's noted. "The debt service reserve fund will be replenished by the federal interest subsidy; if not, then the state as outlined by the moral obligation pledge."

Iowa's rating is supported by low debt levels and conservative fiscal management that has kept fully funded budget reserves in place. The state cut spending by 1.5% in fiscal 2009 as it faced a 2.6% decline in revenue. The state enjoys reserves of $600 million between its rainy-day account and ending balance.

While suffering from the effects of the recession, Iowa has managed through it better than many states. Total job losses have lagged the nation and unemployment is at 5.8%, compared to the national average of 9.2%.

The state's pension funds were well-funded at 88% prior to the declines of last year. The funded ratio has now likely dropped to the high 70% to low 80% range. Iowa has just $219 million in unfunded other post-employment benefits.

The Iowa Department of Management last week reported total gross receipts for the last fiscal year at $6.921 billion, nearly $58 million lower than previous estimates.

"While the state's tax receipts deteriorated more than expected during the last two months of the fiscal year due to the ongoing effects of the national economic recession, this is a manageable number," state budget director Dick Oshlo said in a statement. "Fortunately, receipts improved during the final days of June. At this point we see no legitimate reason for a special session to balance the state's budget."

Republicans have countered that deeper problems exist in the current budget and warn that the state faces a $900 million shortfall based on legislative analysis of the budget and revenue projections.

"Unfortunately, today starts a new fiscal year and the prognosis for Iowa's new budget, the largest in the 163 year history of Iowa, does not look better ... this state cannot afford more of the same out-of-control spending practices that have been implemented by Gov. Culver and his allies in the legislature that are responsible for this mess," Senate Republican Leader Paul McKinley, who is considering a run for governor, said last week.



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