DALLAS — Arizona is rushing to revise disclosure notices to the bond market after unexpectedly losing a line of credit with Bank of America, said John Arnold, director of the governor’s Office of Budget and Strategic Planning.
The line of credit, used several times in the last year to cover revenue shortages, lapsed with the beginning of the new fiscal year July 1 after the state treasurer decided not to renew it.
The State Loan Commission’s failure to renew the agreement last month caught Arizona officials so off guard that it sent out a preliminary official statement on a $300 million of certificates of participation issue that did not cite the loss of the $700 million lending facility, Arnold said. However, the state was able to update the official statement the day of the issue with the new information.
Official statements on several lease-purchase deals this year noted that the agreement was in place through June 30 and that officials were negotiating an extension.
Arnold said yesterday that Arizona is updating its future bond statements but that no further disclosure is needed. Nonetheless, investors are aware of the loss of credit, he said.
“We’ve certainly had calls from investors seeking more information,” he said.
Charles James Jr., bond counsel for the state at Squire Sanders & Dempsey, declined comment.
Arnold said that Gov. Jan Brewer’s office had no indication that Treasurer Dean Martin — one of three members of the State Loan Commission and Brewer’s Republican primary opponent for governor — planned to end the lending provision.
Brewer is also a member of the commission, along with David Raber, interim director of the Department of Administration.
“It was just a complete shock,” Arnold said. “We’ve had months of discussion with [the treasurer’s office] about extending the contract. There was never a hint that they intended not to renew it.”
Arnold said Bank of America had already worked out terms of the extension and was ready to close it.
Martin blamed Brewer’s failure to attend the June 9 meeting of the commission for the loss of the credit. He said he opposed an extension because he wanted Brewer to cut spending instead of relying on short-term loans.
“The state of Arizona, for the first time, will not be spending money it doesn’t have,” Martin said. “Now, this gives us the opportunity to actually cut government spending and require the state to live within its means.”
The Department of Administration is revising a preliminary official statement for an upcoming $60 million refinancing deal for the School Facilities Board in the wake of the decision to cancel the loan. Arnold said the exact wording that will be used has not been decided.
Refinancing SFB debt was one key element of balancing the current fiscal year’s budget. Because Arizona issues no general obligation bonds, it relies on certificates of participation that require annual appropriations of the Legislature.
The state this year has issued about $750 million of COPs to provide revenue for the general fund through the sale and lease back of state buildings. It also leveraged $450 million of lottery revenue to cover operating costs in the current fiscal year.
Even with the loss of the short-term lending facility, the School Facilities Board earned ratings of A-plus from Standard & Poor’s on its refunding COPs, which are being issued to extend maturities in order to ease immediate debt service. However, the outlook is negative.
Moody’s Investors Service has not yet issued its report.
“Although the state has made temporary and permanent expenditure reductions, it has also pulled in significant one-time outside reserves as well as used deficit bonds to bridge gaps,” Standard & Poor’s analyst Matthew Reining wrote. “We believe continued significant financial deterioration — including potential prolonged budget-balancing inaction in the event of further revenue declines — could also impede a return to structural budgetary balance, which could pressure the rating.”
In fiscal 2010, which ended last week, the state issued $86.5 million of treasurer warrant notes to cover spending at an average interest rate of 0.93% and a total interest cost of $3.5 million, Martin said. The line of credit from Bank of America provided liquidity for the warrants maturing in 90 days.
The economic vise continues to tighten on Arizona, as previous sources of revenue, primarily federal stimulus money, vanish. The rainy-day fund has evaporated, which forced the government to use short-term borrowing. Through much of fiscal 2010, Arizona operated with a structural deficit.
Under a recent court ruling, the Legislature must return $4.7 million taken from a special fund for injured workers to help cover state operating expenses. Maricopa County Superior Court Judge Larry Grant said the money to be transferred into the general fund was private money held in trust by the state, not public property.
Martin’s forecast shows Arizona would have needed to borrow funds as early as September, and definitely by Oct. 1. The governor and Legislature now have about 80 days to work out a plan that balances the fiscal 2011 budget and ensure the state has the cash each day to operate.
Brewer and lawmakers got some breathing space in May when voters approved a temporary one-cent sales tax hike that is expected to add $1 billion of revenue. Now they are in suspense over a vote in November that would allow a shift of $325 million in tobacco taxes into the general fund. The revenue had been earmarked for childhood services under the voter-initiated First Things First program.
Another ballot measure would transfer $123 million from land conservation funds into the general fund.