LOS ANGELES — Nevada will not issue liquor tax-backed general obligation bonds after all.
After earlier talk that the Silver State would use $58 million of liquor-tax backed bonds to finance infrastructure costs in its two-year budget, Gov. Brian Sandoval withdrew legislation to authorize the bonds after the state treasurer’s office restructured existing debt to create more capacity in the existing bond structure, said Jeff Mohlenkamp, director of the department of administration.
“Early on in the budget process, we had been working with the state treasurer’s office, who manages the debt for the state,” Mohlenkamp said. “It looked like we might not have the debt capacity to issue around $60 million in bonds.”
Sandoval proposed the liquor tax-backed GOs as part of his $6.55 billion budget for the 2013-15 biennium released in January. The bonds would have been repaid using revenue from the state’s liquor tax, rather than the state’s traditional method of repaying the bonds from a dedicated ad valorem levy on property taxes currently set at $0.17 per $100 assessed valuation.
The state sets aside a portion of property taxes received through assessed valuations to pay off its GO bonds.
Between existing debt and the fact that Nevada’s real estate market was one of the hardest hit, it did not look like the state would have the capacity through traditional means to issue new GOs until 2020.
But Lori Chatwood, deputy treasurer for debt management, and Mark Mathers, chief deputy state treasurer, said the office of Treasurer Kate Marshall was not comfortable with the idea of issuing liquor tax-backed GOs and went through the portfolio looking to capture savings and restructure debt to create more capacity.
“Nevada is pretty unique in the way it issues GO bonds,” Chatwood said. “We have dedicated property tax that acts as a source of payment for GOs that is set aside and separate from the general fund.”
The treasurer’s office scoured the portfolio looking for bonds that could be refunded to realize present-value savings in order to create more debt capacity, Chatwood said. As part of those efforts, in March, he state refunded $199.52 million worth of bonds over five series generating more than $8.6 million in savings, Mathers said.
“We were then able to flatten the debt portfolio, so we could afford to issue another $60 million in GO bonds over the next biennium,” he said.
Nevada doesn’t issue GO bonds with maturity dates past 20 years, which can result in higher payments in the early years of the bonds.
By restructuring the bonds during the refunding, it flattened out the payments over the life of the bonds, freeing up capacity, Mathers said.
The state typically frontloads its debt service structure so that two-thirds of the total debt is paid off in the first 10 years of the life of the 20-year bonds.
The flattening means that not as much of the debt will be paid off in years 1, 2, 3, and 4, which is how Nevada typically structures its bonds -- but the savings on the refunding and flattening created the needed debt capacity without the state having to create another method of issuing GO bonds backed by a different revenue stream.
In addition to efforts to restructure the bonds and savings accrued through the refunding, the real estate market in Nevada is beginning to recover. The treasurer’s office is now anticipating 3% annual growth of property taxes over the next biennium, Mathers said.
“Like the rest of the nation, we are anticipating a fair, but stable recovery,” Mathers said. “That does provide additional capacity as well to issue GO bonds.”
Nevada GOs are rated AA-plus by Fitch Ratings, AA by Standard & Poor’s and Aa2 by Moody’s Investors Service.
