CHICAGO — Days before the end of their 2011 session, Michigan lawmakers sent Gov. Rick Snyder legislation that would allow the state to issue up to $3.2 billion of bonds to cover its federal unemployment debt.
Snyder is expected to sign the three-bill package. Supporters say they want it approved by yearend so the state can enter the market in early 2012.
Several other states are eying the bond option as they struggle to maintain unemployment trust funds amid climbing jobless rates. Texas and Idaho are the only two so far to have sold bonds.
With years of high unemployment levels, Michigan has not been able to cover unemployment benefits with its own trust fund since 2008. Its federal liability now totals $3.14 billion, and with annual interest payments around $140 million, the state would not be able to pay it off until at least 2018, officials said.
Two of the three bills, Senate Bills 483 and 484, create the Employment Security Financing Act and allow the Michigan Finance Authority to issue special revenue bonds to pay off principal on the federal debt as well as create debt service reserves and pay for capitalized interest.
The Finance Authority would be allowed to buy insurance, enter into interest-rate swaps on the debt, and refund the bonds after the original issuance.
Treasury officials in late November issued a request for proposals for a finance team to work on the deal. They are currently evaluating the responses.
The measure allows the Finance Authority to vote by resolution on whether to issue the bonds in a competitive or negotiated sale, or even to do a private placement.
Officials estimate that the state would pay interest rates in the range of 2.5% to 3.5% for double-A rated bonds in the municipal market. That’s lower than the 4.1% interest rate that states currently pay to the federal government on their unemployment loans.
Texas and Idaho both had highly rated deals that saw rates significantly lower than 4.1%.
State fiscal analysts say the borrowing would have a positive impact on the state’s fiscal position.
Offsetting the benefit is the fact that the interest rate paid to the federal government is calculated on a daily average, allowing the state to pay less as the debt decreases, whereas bond interest rates would likely be fixed and would continue over the life of the debt, fiscal analysts said.
The bonds would be backed by a special assessment paid by employers. The treasurer is allowed to set a rate that is sufficient to win the strongest possible ratings, which the state predicts would be in the double-A category, according to a financial analysis of the legislation.