DALLAS — Arkansas plans to price $200 million of grant anticipation and revenue bonds in a competitive sale Tuesday with proceeds earmarked for interstate highway improvements.
Those involved in planning the sale expect a healthy demand for the bonds backed by federal highway grants.
"This highly rated issue will be very attractive to institutional investors because it has a short maturity with a large block of bonds in each maturity," said Dennis Hunt, senior vice president at financial advisor Stephens Inc. "Also, these bonds can be bid as premium bonds which will also be attractive to bidders in the current interest rate market."
Larry Dickerson, chief fiscal officer for the Arkansas State Highway and Transportation Department, said that a competitive sale was appropriate for bonds in the high double-A category.
"We think a competitive sale is more transparent (than negotiated) to the taxpayer, and we feel that the rates we get can be justified as the best rate of the day," Dickerson said.
Arkansas is not a frequent issuer of larger general obligation debt, so high net-worth individuals there get few opportunities for double tax-exempt bonds. Nevertheless, Hunt indicated that retail investors might sit this one out.
"There is a retail market for Arkansas debt," he said. "However, the retail market is currently limited due to the extremely low bond yields that do not appeal to many retail investors."
Hunt has served as an investment banker and manager of Stephens' Northwest Arkansas office in Fayetteville since 1993 and has structured more than $1 billion in Arkansas tax-exempt municipal bond issues.
The bonds are the second of three series from a $575 million authorization approved by voters in 2011.
The Garvees are supported by federal highway grants as well as a four-cent portion of the state's 28.4 cents per gallon diesel fuel tax. Approval of the bond program did not require an increase in the diesel tax.
Gov. Mike Beebe called a special election on the Garvee proposal in November 2011, winning voter approval by a 4-to-1 margin.
The bonds carry Arkansas' general obligation bond ratings of AA from Standard & Poor's and Aa1 from Moody's Investors Service, with stable outlooks. Fitch Ratings does not rate the debt.
"The rating reflects the state's conservatively managed financial operations, healthy year-end fund balances, and low debt ratios, offset by low wealth levels and above average exposure to the manufacturing and transportation sectors," wrote Lisa Heller, lead analyst for Moody's. "The state's automatically triggered spending cuts helped maintain a balanced budget throughout the recent recession and sluggish recovery."
This week's deal comes less than two months after a $469 million issue of sales-tax-backed bonds for the four-lane highway program.
Those bonds, sold through negotiation to Bank of America, earned yields of 3.44% on 3.5% coupons maturing in 2023.
"It was received well," Dickerson said. "Historically, I think, the rates were still low. We were in that period of time when people were dumping treasuries, so timing wasn't perfect."
With a population of about 2.9 million, Arkansas has the 13th largest state highway system in the nation. The Arkansas State Highway and Transportation Department maintains interstate highways 30, 40 and 55. Interstate 540 from Fort Smith to Bella Vista will become a segment of the future Interstate 49.
The Arkansas Transportation Department also oversees the Connecting Arkansas Program, approved by voters in 2012. The CAP's 0.5% sales tax increase approved by voters as a 10-year constitutional amendment in November 2012 was designed to generate $1.45 billion for the state highway department over the next decade and another $626 million for city and county road projects.
About 83% of the $102 billion worth of commodities delivered annually from sites in Arkansas is transported by trucks, according to TRIP, a national transportation research group based in Washington, D.C.
The Arkansas highway department spends approximately $1 billion of state and federal money on road projects each year, but officials said that is not enough to adequately maintain the state's highways. The 650 miles of rehabilitation and upgrade projects in the two bond-financed programs cover just 4% of the state's 16,400-mile road network.
While Arkansas' large manufacturing sector was relatively hard hit during the recession, some growth in the natural resources, mining and tourism sectors offset the decline, analysts noted. After steep revenue declines in fiscal 2010, Arkansas saw moderate growth in its gross revenues in fiscal 2011, 2012 and 2013.
In terms of household income Arkansas is the third poorest in the nation behind Mississippi and West Virginia, according to the 2010 U.S. Census.
The state recently approved Medicaid expansion under the Affordable Care Act, with legislative approval contingent on the expanded population being insured through the state's insurance exchange.
"Although this manner of operating will require a federal waiver, the administration believes that the state will receive such a waiver," wrote Standard & Poor's analyst Henry Henderson.
About 30% of all manufacturing employment in the state is concentrated in the food sector, according to IHS Global Insight Inc. Poultry processing is the largest industry by employment in Arkansas, and Tyson Foods Inc. is the leading firm in the state's food manufacturing sector.
"Expansion going forward will be slow as food processors struggle with high feed costs and weak chicken demand in particular," Heller noted. "Below average population growth will moderate economic growth over the long term."
The 2012 per capita nominal gross state product was $37,150, or 75% of the U.S. level, and ranked 48th in the U.S. The state's per capita personal income is only 81% of the national level, according to S&P.
With Wal-Mart's headquarters in Bentonville, Arkansas enjoys a significant economic boost from its largest employer.
Arkansas historically has been a low debt state, analysts said. Based on Moody's 2013 state debt medians, Arkansas' net tax-supported debt is 39th among states.
Arkansas' net tax-supported debt is 1.2% of its personal income, compared to the U.S. median of 2.8%. As a percentage of its total economy, Arkansas' debt also is low, at 0.95%, compared to the median level of 2.4%, according to Moody's.
The state's two main pension plans are funded at 68.9% for the Arkansas Public Employees Retirement System and 90.2% for the Arkansas Highway and Transportation Retirement Plan as of June 30, 2012.
The state's adjusted net pension liabilities, according to Moody's, are $4.5 billion for APERS and $484.3 million for Highway, totaling $4.9 billion or 33.6% of all governmental fund revenues.
The state's two post-employment benefits programs are financed on a pay-as-you-go basis. In 2012 the state paid approximately $51.2 million in OPEB benefits to the Arkansas State Police Medical and Rx Plan and Arkansas State Employee Health Insurance Plan, or 1% of net general revenue, and 26% of the actuarially required amount.
"We view Arkansas' OPEB risk to be moderate, given the relatively limited benefits provided," Henderson said.