DALLAS — With higher education at the center of Arizona’s debate over how to revive its struggling economy, two of its major state universities will issue $237 million of revenue bonds to upgrade their flagship campuses.
Arizona State University in the Phoenix suburb of Tempe will issue $172 million of bonds on March 23, while Northern Arizona University in Flagstaff plans to price $65 million on the same day.
The Arizona Board of Regents, which supervises the state’s three major university systems, will appear as the issuer, though the universities structure their own deals with underwriters, financial advisers, and bond counsel. The regents approved the sales at their meeting in January.
Only $11 million of ASU’s bonds will be tax-exempt, with the rest being Build America Bonds. This will be ASU’s first use of the federally subsidized taxable debt.
“We’re certainly looking for a strong response from the market,” said Morgan Olson, ASU’s chief financial officer. “Typically our bonds are oversubscribed.”
Barclays Capital will be senior manager on the ASU deal. Wells Fargo Securities will manage the NAU sale with Bank of America Merrill Lynch and Citi as co-managers. RBC Capital Markets is financial adviser on both deals.
NAU, which was the first Arizona university to issue BABs last year, this time is planning to structure the deal as $60 million of BABs and $4.8 million of tax-exempt revenue bonds. Robert Norton, assistant vice president and controller for Northern Arizona University, said the bonds could all be BABs.
“It’s going to depend heavily on the markets that week,” he said.
NAU’s deal is also the first use of the state’s newly created SPEED revenue bonds, which stands for Stimulus Plan for Economic and Educational Development. The bonds were designed to receive 80% of debt service from state lottery proceeds. The universities would pay the other 20% from their own revenue. However, with Arizona’s economic crisis, lottery revenue will not be available for the first two years of the 20-year bonds, so NAU will cover those years 100%, Norton said.
Standard & Poor’s gave an A rating for the NAU bonds. Moody’s Investors Service rated the debt A3.
“There is no guarantee that any lottery monies will be available in any given year,” Moody’s analysts Kimberly Tuby and Amy Tanaka wrote. “To this point, NAU currently is not budgeting for any lottery funds to be available in FY 2010 or 2011.”
Meanwhile, Standard & Poor’s last week shifted its outlook on the AA rating it assigns ASU to negative and Moody’s yesterday downgraded the credit to A1 from Aa3 with a stable outlook.
Standard & Poor’s cited the university’s heavy indebtedness, at 8.2% of 2009 operating expenses, and “uncertain levels of state financial support.” State funding for fiscal 2009 dropped 13.8% as the Legislature wrestled with what some consider the worst financial crisis in state history.
“The negative outlook reflects our view of the increasing debt level of the university, additional upcoming debt plans, low levels of financial resources for the rating category, and continued stress from the state, both from decreased appropriations and delayed appropriation payments,” said Standard & Poor’s analyst Jessica Matsumori. “A strengthened balance sheet and operations in addition to the stabilization of state support could result in a return to a stable outlook, while further deterioration of financial strength ratios, liquidity problems, or inability to manage through a challenging state funding environment could result in a negative rating action.”
So far this year, ASU has experienced a nearly one-month delay in its state operating appropriations. Officials believe the state may choose to delay a month or two of payments toward the end of the fiscal year to help close a budget gap.
Moody’s downgrade “is driven by a steady increase in both operating and balance sheet leverage, thin operating performance, cuts in state funding, and thin liquidity relative to a very large expense base and significant debt service responsibilities,” the agency said. “The outlook remains stable at the lower rating level reflecting the university’s healthy market position and expectation that management will continue to focus on long-term growth of net tuition revenue and containment of expenses.”
The university budget crisis is coming as lawmakers look for ways to close Arizona’s $3.5 billion budget shortfall in the fiscal year beginning July 1. Gov. Jan Brewer has won approval of a three-year sales tax increase from lawmakers but must get voter approval in May before the one-cent hike can go into effect. Even if voters approve, the increase would provide little help this year.
Meanwhile, lawmakers are looking for other areas to cut in a state that already ranks 45th in per-capita spending and 48th in per-capita education spending.
The fiscal crisis is expected to worsen as the impact of falling property values combines with falling tax collections to weaken state and local revenue in the next two years. Arizona was dependent on the housing sector, which has all but collapsed in the state. Arizona has fallen from second in job growth to 49th since the recession hit in 2007, according to economist Elliot Pollock, chief executive of Elliot D. Pollack & Co.
Higher education officials and political leaders have debated the role of the universities in restoring the economy. Under former Gov. Janet Napolitano, the state invested heavily in research and technology, attracting new biomedical firms and spinoffs from the universities. The SPEED bond funding, approved by last year’s Legislature, was part of a $1 billion construction-stimulus bill designed to create jobs.
While ASU will use its bond proceeds to build a new research building that promises potential jobs in energy, space, and earth-science technology, NAU’s SPEED bonds are limited to maintenance projects, some of which have been long deferred.
The University of Arizona in Tucson will use $68 million of the bonds on a parking garage and several deferred maintenance and building renewal projects. Arizona State will also use $33 million of SPEED bonds for similar needs.
One question hanging over the SPEED bonds is the competing demands for lottery revenue. After mortgaging state buildings this year to raise operating funds, the Legislature has approved borrowing $450 million over 20 years and backing the debt service with lottery proceeds.
Rating agencies, which have downgraded the state’s credit in the past year due to the failure to fix a growing budget shortfall, are taking a skeptical view of debt service on the SPEED bonds.
“Based on the lack of a security interest in any lottery revenues and the ability of the state to potentially reduce the allowable amount to be deposited into the SPEED fund by changing the statute ... we do not believe this potential funding source currently enhances the credit above the fundamental credit of NAU,” Moody’s said.
