Arizona School Facilities Board Refunds Third of Debt

DALLAS – The Arizona School Facilities Board will refund more than a third of its outstanding debt with $315.4 million of taxable revenue bonds in a negotiated deal scheduled to price Tuesday.

The underwriting team is led by Bank of America Merrill Lynch and Citi with four co-managers. Stifel Nicolaus & Co. serves as financial advisor, with Squire Sanders as bond counsel.

With short maturities running through 2020 and triple-A ratings from all three ratings agencies, the bonds are expected to find a ready market, according to ASFB deputy finance director Phillip Williams.

The bonds that will be refunded were issued in 2005.

Voters created the Arizona School Facilities Board with the approval in 2000 of a transaction privilege tax designed to finance new school construction and improvements statewide. The ASFB was designed to solve the problem of unequal funding in various districts and to set a standard for all school buildings. The board’s creation followed an Arizona Supreme Court orders requiring equalization of funding statewide.

The 0.6% tax that backs the board’s $800 million of outstanding debt expires on June 30, 2021, which places a limit on bond maturities. The state levies the tax on the sales or income from retail activity but excluding hotels, mining, and certain other types of business.

The board’s original bond resolution authorized issuance of up to $800 million of first-lien debt backed by pledged sales taxes and prohibited additional parity debt issuance over that level.

The also issues separately secured state general fund lease-revenue debt to help finance continuing school construction.

Like other government agencies, the ASFB has struggled with the sharp economic downturn in 2008. Pledged sales tax revenue decreased 24.3% from a peak of $666.2 million in fiscal 2007, to $504.4 million in 2010.

Revenues rebounded 2% in fiscal 2011, and another 5.5% in fiscal 2012, to $542.4 million as economic activity picked up.

A school building boom came during 24.6% population growth from 2000-2010. Even in periods of payroll declines and rising unemployment during the recession, population continued to grow, though at a slower pace. The state’s most recent census showed a population of 6.4 million.

“We expect to see the population continue to grow as the economy recovers, in part driven by in-migration and the state's affordable housing market, which we believe has begun to recover from the effects of the real estate downturn,” wrote Standard & Poor’s analyst David Hitchcock.

With the housing market still slumping, Arizona’s average annual unemployment was above the national average in 2012 at 8.3% compared with 8.1% for the nation.

Per capita personal income was $35,062 in 2011, representing 84% of the national per capita personal income, a slight drop from earlier years, according to Hitchcock.

Coverage ratios on outstanding bonds is what Hitchcock calls “a very strong 8.4x.”

“Arizona projects pledged revenue growth of about 4.8% in the fiscal year ending June 30, 2013, and 5.4% growth in each of fiscal years 2014 and 2015, which could potentially increase MADS coverage further,” he wrote.

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