New Hampshire Wednesday will refund approximately $170 million of general obligation debt to generate savings as the state works towards filling a $140 million budget gap for fiscal 2010 and 2011.
Morgan Keegan & Co. Wednesday will kick off investor pricing following one day of retail sales. Edwards Angell Palmer & Dodge LLP is bond counsel. Public Resources Advisory Group is the financial adviser.
Officials are still working on the exact size of the deal, which will depend upon market conditions.
The preliminary official statement indicates a size of $175.8 million, though the issue could come in at $170 million, said Jock Wright, senior vice president at Morgan Keegan.
Fitch Ratings and Standard & Poor’s rate the fixed-rate refunding GOs AA with a stable outlook.
On March 30, Fitch announced it will recalibrate New Hampshire’s GO rating on April 5 to AA-plus from AA. Fitch, Standard & Poor’s, and Moody’s Investors Service are reassessing their public finance ratings to evaluate municipal debt as they would corporate debt.
Moody’s assigns a Aa2 to the refinancing. The outlook is stable.
The Series 2010A bonds will offer serial maturities from 2011 through 2027, according to the POS. The deal will current and advance refund outstanding bonds.
“We’re looking at intermediate institutional funds,” Wright said. “There seems to be a fair amount of demand for high-quality, general obligation paper. And seeing that the rating is Aa2 and double A, we expect that we will have a fairly broad range of investors, both trust-investment advisors and the larger institutional investors.”
The refunding comes during a quiet week following the Easter Holiday. Since New Hampshire is not a frequent muni issuer — it has only $900 million of outstanding debt — the deal will probably get a very strong reception, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott.
“The market demand will make the deal very successful,” Schankel said. “It’s a good name and a lot of people don’t own the name because New Hampshire doesn’t issue a lot of debt.”
The state is anticipating the sale will garner an estimated 3.05% present-value savings, to be used almost entirely in 2010 and 2011, according to a Moody’s report on the credit.
Potential refunding candidates include bonds sold in 2000, 2001, 2003, 2005, 2006, and 2008, according to the POS.
New Hampshire’s $900 million of GOs extend through 2028, according to the official statement for Series 2009B and Series 2009C bonds the state sold on Dec. 15. Its debt per capita is $525, below Moody’s state median of $865.
The rating agencies noted that New Hampshire’s debt amortization is above average, and 70% of its general fund debt will retire in 10 years, according to a Standard & Poor’s report. The state has no variable-rate debt and no derivatives.
New Hampshire’s tax structure is slightly different from that of other states. It does not have a personal income tax or a sales tax.
The general fund is supported from business tax receipts and other revenue streams, including a meals and rooms tax, a tobacco tax, and an interest and dividends tax.
“They have a really unique tax structure,” said Fitch analyst Karen Krop. “They don’t have personal income tax or general sales tax. They rely primarily on business taxes, but also a very wide variety of small fees and taxes rather than a couple of big main taxes in the way that other states do. And I think it makes it somewhat more economically sensitive.”
Like most states, New Hampshire has revenue collections that are coming in under budgeted estimates. Total general and education fund revenue for July through February are $49.6 million below projections, according to the POS. In addition, officials estimate that fiscal 2010 revenue and fiscal 2011 revenue will be $33.3 million and $31.7 million below budgeted estimates.
The state is now facing a $140 million combined budget shortfall for the current fiscal year and fiscal 2011.
That $140 deficit includes a $65 million combined revenue shortfall and $30 million of additional expenditures mainly due to increased Health and Human Services case loads, according to the POS.
In addition, the New Hampshire Supreme Court on Jan. 28 ruled against the state transferring $110 million from the Joint Underwriters Association medical malpractice insurance fund to the state general fund, affecting fiscal 2009, 2010, and 2011.
That decision leaves a $22.5 million budget gap in both the current fiscal year and the next.
Gov. John Lynch in early February directed state agencies to cut spending by 2% this year and 8% in fiscal 2011 to help close the $140 million deficit. The governor is expected to release his deficit plan in mid-April.
That strategy would include spending reductions along with potentially using $80 million of fiscal 2011 federal funds from the American Recovery and Reinvestment Act in fiscal 2010, pending federal approval.
“All options are under consideration to address the projected shortfalls, including revenue increases, expenditure reductions, and possible restructuring of state debt,” the POS said.
While officials address declining revenue and budget shortfalls, the state’s unemployment level of 7.1%, as of February, is below the national rate of 9.7%. Moody’s expects the state will respond to its budget challenges “and rebound more quickly than the rest of the county.”
“They had a relatively strong economy coming into the recession and they look to be recovering coming out of it in pretty good shape,” Krop said.
Other fiscal challenges include pension and other-post-employment benefit obligations.
The state’s unfunded pension liability as of June 30, 2009, is $3.53 billion, with a funding ratio of 58.3%, according to the OS for the Series 2009B and Series 2009C bonds.
In addition, New Hampshire’s unfunded OPEB liability is $2.47 billion, as of June 30, 2008, the OS said. Moody’s views this obligation as high for a small state.
“The liability is entirely unfunded and the state has not created a trust to fund the liability,” Moody’s said.
