Indiana continued its exploration of public-private partnerships with the start of the legislative session this year, as the state finalized a busy year that saw the largest transaction for a public asset in the country and bond issuance that largely followed national trends.
The lease of the Indiana Toll Road not only set the stage for Gov. Mitch Daniels' agenda to complete more P3 deals, but also allowed the state to use proceeds for economic development projects.
After the successful lease of the 157-mile toll road for $3.8 billion, Daniels proposed three other P3 projects for legislative consideration.
The state leased the toll road to a consortium made up of Cintra Concesiones de Infraestructuras de Transporte and Macquarie Infrastructure Group. Based in Spain and Australia, respectively, the companies won the Chicago Skyway lease bidding for $1.82 billion transaction the previous year.
In his second state of the state address in office in January, Daniels said one of the keys to attracting new business in the state is a good road system. He touted his plans for two new toll roads that would be developed through P3s: the Illiana Expressway, which would link the state to Illinois and alleviate congestion, and the Indiana Commerce Connector, which would link four interstates near Indianapolis.
Building the roads with private capital and collecting a franchise fee for the right to operate the roads offers the state an "enormous opportunity" that should not be missed, he said.
Daniels wants legislative approval for funding to explore the connector, which would cost an estimated $1.5 billion. The state would use some of the proceeds from the toll road lease to fund a portion of the project.
Officials believe that the value of the roadway would generate enough funds to pay for other projects. Last month, an alliance of Marion County neighborhood group announced its opposition to the project. The Senate has approved of the plan, but the House has yet to vote.
The state, working with Morgan Stanley as financial adviser, is reviewing more than a dozen applications from firms interested in bidding on a long-term lease of the Hoosier Lottery. The governor wants to lease the lottery for an upfront payment of $1 billion and an annual payment of $200 million over the 30-year term of the lease. The upfront payment would fund university scholarship and research programs and the annual payment would replace the annual profits now generated by the Lottery.
The Senate approved the authorizing legislation, but it has since stalled in the House where it lacks enough support to pass. Daniels is a Republican and the GOP holds a majority in the Senate, but House control shifted to the Democrats following last November's election, and they have made known their opposition to proposed privatization plans.
Even if the measure is not called up for a full House vote, it is eligible to go to a conference committee made up of members from both chambers since it has passed at least one chamber of the General Assembly. If the legislature approves the plan, the state will allow qualified firms to compete in a bidding process.
Daniels introduced a $25.8 billion biennial budget in January, with an eye to increasing spending by 3.8% in fiscal 2008 and 3.3% in fiscal 2009. The administration projected that revenues would come in 4.1% higher in 2008 and 4.3% higher in 2009.
By the end of fiscal 2009, the administration projects a $1.2 billion ending balance, if revenue forecasts hold up. Daniels also proposed raising taxes on cigarettes. The state still must make up about $400 million in payment delays to schools and universities that were instituted due to a massive spending shortfall. In addition, cash balances will amount to about 7% of the budget while budget director Charles Schalliol said he prefers the 10% that is recommended.
Rating agencies took note of the improving budget. Moody's Investors Service changed its outlook to stable from negative for the state's Aa1 underlying issuer credit rating last year. Standard & Poor's also raised its issuer credit rating last year to AA-plus from AA and boosted its lease obligation debt rating to AA from AA-minus. Fitch Ratings rates Indiana's lease-backed debt AA.
Daniels has touted the use of P3s as a way to free up funds for projects and to avoid adding debt to the state's books. The proceeds from the existing toll road lease has helped fund a variety of projects and has paid off outstanding bonds issued through the Department of Transportation.
Indiana issues no general obligation bonds, but issuance was strong for conduit agencies. The Indiana Health and Educational Facility Financing Authority completed 17 transactions for health and educational related entities and two pool loan deals for $2.1 billion in volume last year, said Jennifer Alvey, chief operating officer for the Indiana Finance Authority. That marked the IHEFFA as the third largest Midwest issuer for the year.
Health care topped the charts with Clarian Health Partners in Indianapolis selling two series of bonds, in January and September, totaling $702.6 million. The authority issued $620 million on behalf of the Sisters of St. Francis Health Services Inc. in May. In October, it sold $562.9 million for Ascension Health.
In 2007, the agency expects issuance to go up - particularly in education - as borrowers take advantage of a newly implemented fee structure that could make issuing through the IHEFFA more cost effective.
The Indiana State Housing and Community Development Authority issued nine deals for $517.5 million in volume in 2006.
The Indiana Finance Authority completed 17 deals for $672 million in volume. The IFA issued $221 million in April and $142.9 million in November to complete two state revolving fund deals. In September, it issued $60 million of environmental facilities revenue bonds on behalf of the Indianapolis Power & Light Co. In addition, the IFA issued $62.9 million for a forensics and health science laboratory project.
The authority recently sold $230 million of bonds for the Indianapolis Colts project, the second deal for the $1 billion football stadium and convention center project, said IFA president Ryan Kitchell. JPMorgan senior managed the deal with Barnes & Thornburg as bond counsel.
The Indianapolis Local Public Improvement Bond Bank also completed a busy year with seven deals for $590 million of bonds as the city took advantage of interest rates and refunding opportunities. This year also is expected to be busy, said executive director Barbara Lawrence.
The bond bank issued two separate airport revenue bond issues in 2006 for its ongoing $1 billion midfield terminal project for the Indianapolis International Airport. The bank issued $350 million of tax-exempt bonds subject to the alternative minimum tax and about $43 million of taxable bonds. The bond bank expects to issue what could be a few hundred million of bonds in 2008, Lawrence said.
The bond bank advance refunded nearly $80 million of 2002 bonds issued to fund the city's purchase of its water system. The January deal was the largest refunding for the city in 2006. The bond bank also refunded bonds issued on behalf of United Airlines at the Indianapolis International Airport and completed two state revolving fund bond deals and one storm water revenue bond deal.
Indianapolis officials also are watching state legislation that would allow the city to issue pension obligation bonds in 2007 or 2008.
"It's shaping up to be another busy year," Lawrence said.
Total reporting entity
infrastructure, net. $7.877 billion
Source: Merritt Research Services LLC. Data compiled from the most recently issued comprehensive annual financial report.
Top Issuers '06
Indiana Hlth & Ed Fac Fin $2,127.9
Indiana Finance Authority 672.7
Indianapolis Loc Pub Imp 590.1
Indiana Hsg Comm Dev 517.5
Indiana Secs Mkt Ed Lns 500.0
*Dollars in millions Source: Thomson Financial
Key Contacts
Ryan Kitchell
Director
Indiana Finance Authority
One North Capitol, Suite 900
Indianapolis, IN 46204
317-233-4334
rkitchell
Dan Huge
Executive Director
Indiana Bond Bank
10 Market St., Suite 2980
Indianapolis, IN 46204-2982
317-233-0090
dhuge
Dan Kramer
Executive Director
Indiana Health and Education Facility Financing Authority
One North Capitol, Suite 900
Indianapolis, IN 46204
317-234-2110
dkramer
