DALLAS - A year after the Arizona Legislature carved out a new niche in public finance on tribal lands, the Ganado Unified School District on the Navajo reservation is going to market with $15.9 million of impact aid revenue bonds.
The negotiated deal planned for pricing next Wednesday is the latest in a series authorized by the Legislature last year.
"We had to work very closely with the state to get that enabling legislation," said Mark Reader, a director at underwriter Stone & Youngberg in Phoenix. "There were a lot of issues that we had to work out collaboratively."
Because they are backed by federal impact aid, the revenue bonds are comparable to grant anticipation revenue vehicles for highway construction in that they leverage federal funds based on annual Congressional appropriations. Recipients of such impact aid include schools on or near military bases, Indian reservations, or federal land. Local school districts receive no property tax revenue from military bases, Indian reservations, or federal land and the aid is provided to help offset the costs of educating children who live on the bases and reservations.
The Ganado Unified School District receives impact aid of $9 million per year, of which about $1.5 million will be pledged to debt service, Reader said.
"Until now, schools on reservations had to simply use the money on a pay-as-you-go basis," he said.
Although the bonds are not bank-qualified, Reader expects banks to buy a healthy share of them to satisfy federal requirements for investing in historically underserved areas under the Community Reinvestment Act.
"We'll market them aggressively," said Reader, who developed the bonding program when he worked at Peacock, Hislop, Staley & Given, the deal's co-manager.
"We were on a higher interest rate last summer, and we were in the mid-4% range, and we hope to be in the mid-3s," he said.
"There's been good acceptance because they've got A-type ratings and they pretty much trade a touch lower than a GO, more like an A-rated revenue bond," said Thomas R. Hislop, a partner at Peacock Hislop.
Because the bonds are backed by federal revenue, they carry relatively high underlying ratings of A-plus from Standard & Poor's and A-minus from Fitch Ratings. But like all previous impact aid issues in Arizona, the Ganado bonds also will carry insurance to earn triple-A ratings. The upcoming bonds are insured by Ambac Assurance Corp.
Moody's Investors Service does not rate the debt.
"The long, relatively stable history of impact aid, strong security provisions, a relatively short bond maturity schedule, and good debt service coverage minimize risks associated with future federal budget pressures on domestic discretionary programs or program rule changes," Fitch analyst Jason F. Dickerson wrote. "District financial flexibility is strong, offsetting concerns about the significant increase in leveraging of impact aid associated with this voter-approved financing."
Ganado USD, which includes 2,000 square miles of Navajo territory bordering New Mexico, enrolls more than 2,000 students, of whom 98% are Native American. While the Arizona School Facilities Board finances classrooms and equipment, the agency does not cover cafeterias, athletic facilities, and ancillary construction. Proceeds from the Ganado revenue bonds will be used to build a natatorium, playing fields, and housing for teachers.
Risks come primarily from the fact that the bonds are dependent on annual appropriations for impact aid, which would fall by $170 million under President Bush's proposed budget for fiscal 2004. Although school districts serving military bases would be most directly affected by the cuts, the National Indian Education Association has joined other lobbying groups in opposing reductions.
Rep. J.D. Hayworth, R-Ariz., whose district includes the lion's share of the Indian impact aid regions, co-chairs the House Impact Aid Coalition opposing the cuts, which would affect about 1,500 local school districts in the United States.
In Hayworth's district, tribal territory accounts for about half of the land mass. Eligible schools in the Sixth District, including Ganado, will share $98.5 million of the $132 million Arizona receives for impact aid in the current federal budget.
