Pennsylvania Plans $2B-Plus of GOs by the End of the Year

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Pennsylvania is gearing up to issue at least $2 billion of general obligation debt via competitive bid before the end of the calendar year as officials keep a wary eye on the possible expiration of the Build America Bond program.

Rick Dreher, director of the bureau of revenue, cash flow, and debt, said his team is working on a $1 billion tax anticipation GO note deal and a $400 million GO refunding sale tentatively set for the first week in October, depending on interest rates.

Under its constitution, the state issues GO new-money and refinancing transactions through competitive bid. Public Financial Management Inc. is the state’s financial adviser.

This will be Pennsylvania’s second Tan deal since 1997. In December 2009, it sold $800 million and borrowed about $650 million from the motor-license vehicle fund to help support its cash-flow needs. Between 1998 and 2008, the state did not need to rely on short-term borrowing. Declining revenues necessitated last year’s $800 million note deal.

This year, officials anticipate issuing $1 billion of Tans. There are no plans at this time for an internal borrowing from the motor-license vehicle fund or another fund. Fiscal 2011 began July 1.

“If we experience revenue shortfalls like we have the past couple of years, we may have to do a second Tan or maybe some second type of internal loan,” Dreher said. “We’ll monitor that as the fiscal year develops.”

The $400 million refunding could generate about 5.5% of net present-value savings for the commonwealth, or $25 million. Officials are looking to grab lower interest rates on debt sold in 2004 and 2008, according to Dreher.

“It’s certainly something we’re interested in, given the current budget environment,” he said.

Like most states, Pennsylvania has had to cut spending by several billion dollars during the past two years to help offset declining tax collections.

After the October deals, the state in December plans to issue $600 million to $1 billion of taxable BABs to help finance infrastructure needs.

The state tends to sell new-money debt in November or December and again in the spring. It could opt to issue the bulk of its nearly $2 billion of new-money borrowing capacity for fiscal 2011 in the December BAB transaction, depending on whether or not Congress extends the BAB program and if they alter the interest rate subsidy included in that plan.

Taxable BABs offer issuers a lower cost of borrowing with a 35% federal subsidy on interest costs. BABs are a product of the American Recovery and Reinvestment Act.

The BAB program is set to expire at the end of 2010. If Congress chooses to continue it, lawmakers may opt to lower the subsidy rate, which would decrease savings for issuers.

Dreher said that since the state has such a large capital program, it could boost the December BAB deal above $1 billion to take advantage of the stimulus program while it lasts.

“From a tax and arbitrage-regulation perspective, I would have no problem meeting spending requirements if I issued my whole year’s worth of bonds,” he said.

Pennsylvania will have a new governor in January since Gov. Edward Rendell is prohibited from seeking a third consecutive term. Dreher said the most immediate issue for the incoming governor will be crafting a fiscal 2012 budget that will not include ARRA funds. In addition, the state’s pension contributions will increase dramatically in fiscal 2013.

“There will be significant challenges to an incoming administration — dealing with replacement of federal ARRA funds and expenditure pressures, particularly from pensions,” Dreher said.

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