DALLAS – Utah will give the competitive market a $150 million taste of its top-rated general obligation bonds this month, with about $1.5 billion more to come over the next four years.
The June 27 competitive pricing follows a legislative session that authorized $1 billion of highway bonds. The same session added $100 million of bond authority to the $550 million approved in 2015 for the long-sought relocation of the state prison in Draper.
Proceeds from next week's deal will provide $100 million for the prison with the rest for transportation projects in Salt Lake County.
Utah Treasurer David Damschen expects the usual strong demand for the state’s debt, which is infrequently issued and short in maturity.
“We’re only going out 10 years on the prison and 15 on the highways,” Damschen said. “We usually have 12 to 14 bids in hand, and we don’t expect anything different this time.”
Damschen and Gov. Gary Herbert put out statements celebrating the three ratings agencies’ confirmation of Utah’s triple triple-A status, one that only 10 states enjoy.
“Our triple-triple rating and broad economic success can be largely credited to the principles of fiscal discipline and budgetary restraint, which we have worked closely with the legislature to maintain year after year,” Herbert said.
Even as the state’s economy maintains strong momentum, officials are building up defenses against possible downturns, rating analysts wrote. For example, Utah’s 87% funded ratio for its state pensions is the envy of many states.
“By following a practice of building reserves during periods of economic expansion, Utah builds up resilience for economic slowdowns,” said S&P Global Ratings analyst David Hitchcock. “Furthermore, its approach to budgeting for structural fiscal balance and breaking out the use of one-time revenues for one-time expenditures stands out as prudent fiscal management, in our opinion.”
Other Utah fiscal practices include binding consensus revenue forecasting, multi-year financial planning, budget stress testing review, and a debt affordability analysis.
Utah’s history of continuous triple-A bond ratings dates to 1965, when S&P began its rating system. The state’s Aaa rating from Moody’s Investors Service dates to 1973, and Fitch Ratings conferred its triple-A in 1992.
Payroll employment growth in Utah has averaged about 3% annually since 2010, almost double the national pace, according to Moody’s. Personal income growth has averaged about 6% over the same period, almost two percentage points greater than the nation's growth rate of 4%. Because of rapid population growth, however, the state's per capita personal income growth of 4.3% since 2010 exceeded the nation's 3.5% pace by a smaller margin.
“Although the state's traditional strength in extractive industries remains a feature of the economy, Utah's economy is diverse and is emerging as an important regional center in information technology, finance and business services,” said Moody’s analyst Marcia Van Wagner. “The state has also experienced strong growth in education and health services, driven to a large degree by its rapidly expanding population.”
From a high of 8% in 2010, Utah's unemployment rate fell to 3.1% in April, well below the U.S. rate of 4.4%.
“Notably strong population growth has helped propel the state's economy, but at the same time pressures the budget, especially for education,” Van Wagner noted. “Since 2000, Utah's population has increased about 36%, well ahead of the nation's 15% growth.”
Utah's birth rate is the nation's highest and its population is the nation's youngest with a median age of 31, seven years younger than the U.S. median.
Continued economic development in the suburbs south of Salt Lake City motivated lawmakers to approve the prison move from Draper to a site near the Salt Lake City Airport.
The 700-acre site of the current prison in an area known as Point of the Mountain is expected to become part of a growing high-tech development midway between the University of Utah and Brigham Young University.
“The value of the prison site is largely dependent on the economic success of the entire surrounding area, and the economic success of the surrounding area is dependent on a forward looking plan for the prison site,” according to the planning organization Envision Utah.
According to a 2005 study by Wikstrom Economic & Planning Consultants the cost of relocating the prison far exceeded the value that could be realized from the sale of the Draper prison site. Despite that finding, a special session of the state legislature in 2015 voted to move the prison to the west side of Salt Lake City.
Last December, the Prison Development Commission reported that the cost of relocating the prison would be $100 million higher than the $550 million already approved. That prompted Herbert to call for the additional bonds in the 2017 session.
Despite objections to the higher cost, Herbert emphasized that the additional funds were not due to cost overruns at the new site between the airport and Great Salt Lake.
Salt Lake City Democrats objected to the expense for a project they said the city never wanted at the 350-acre site, which is surrounded by wetlands. In fact, no community openly sought the new prison.
"This was one of the most expensive sites," Sen. Luz Escamilla, D-Salt Lake City, told the Senate. "We need to be reminded this was a fiscally irresponsible decision that was made by this Legislature, and now we're paying consequences by putting $100 million more to this project."
With groundbreaking this month, the new prison is expected to be completed in 2020.
While that project develops, Utah put together a timetable for issuing the $1 billion of bonds approved by the Legislature in March.
“We decided the ideal timing was to come to the market in January of each year going forward,” Damschen said. “We’ll be going to market in January 2018 with $410 million and $450 million in 2019. In 2020, we’re planning to issue $450 million, with $209 million in 2021. That’s all preliminary.”
"This issue marks the beginning of a four-to-five year program to finance new highways and a prison relocation," said Jon Bronson, managing director of Zions Public Finance, the state's financial advisor. "There will be a negotiated sale at the beginning of 2018 of approximately $400 million of general obligation bonds using JPMorgan as lead underwriter. The rest of the team for that transaction has yet to be named."
The highway bonds were authorized in Senate Bill 277 by Sen. Wayne Harper, R-Taylorsville, who saw the bonds as a way to free up money for K-12 education while taking advantage of low interest rates.
Under House Bill 2, Utah plans to invest $1 billion into K-12 education over five years, with per pupil spending increasing by 4%. The bill shifts the cost of teacher licensing to the state rather than the teachers. Funding for teacher supplies has been moved from one-time to ongoing funds, meaning it can now be counted on as part of the budget each year.
Under the $16.2 billion budget approved by lawmakers, most of the increase goes to education.
"We have $230 million of new money going into public education, and $144 million of new money going into higher education,” Herbert said. “That is a significant lift. It is certainly not where we need to end up, but it says we are going in the right direction and going in the right way.”