DALLAS — Triple-A-rated Utah will offer investors a safe bet this week with $217 million of general obligation bonds for the Beehive State’s growing highway system.
The bonds are scheduled for competitive bids on Thursday, with Zions Bank as financial advisor.
Market conditions have recently prompted some issuers to postpone deals, but Utah Treasurer Richard Ellis is optimistic.
“We feel like the market’s in good enough shape to do a competitive sale,” Ellis said. “Rates are at a higher level now, and we’ll have to deal with that. But we expect to have a pretty good sale.”
The issue is the second big deal from Utah this month. The University of Utah priced $128 million of revenue and refunding bonds through negotiation on July 2, drawing yields of 4.25% on 5% coupons maturing in 2043. Those bonds, backed by the university’s revenue pledge, carried a notch lower rating than the state’s GO debt.
With only $3.1 billion of GO bonds outstanding, Utah carefully guards its credit rating with relatively short maturities and strong debt-service coverage. The upcoming issue will mature serially over 15 years.
The Utah constitution limits GO indebtedness to 1.5% of the value of taxable property.
Utah is one of seven states to earn a triple-A bond rating by all three of the rating agencies. The state has earned top marks since 1965 when Standard & Poor’s began its rating system. Utah’s AAA rating with Moody’s dates to 1973, and the Fitch Ratings triple-A was bestowed in 1992.
“This is no surprise,” Utah Gov. Gary Herbert said of the ratings last year. “Utah has a legacy of sterling ratings because of prudent fiscal management and conservative budgeting.”
Institutional investors who need the security of top-rated paper tend to latch onto Utah’s debt, but opportunities are as rare as rainfall in the nation’s second driest state. Last year, issuers of all types offered only $3.1 billion of bonds, according to data from Thomson Reuters. The Utah Board of Regents accounted for 20% of the volume with nearly $639 million from five issues.
Investors looking to buy Utah paper at the long end of the yield curve are out of luck, as maturities are limited to 10 years, except for transportation issues like this one, which can run 15 years. The state does not issue variable rate debt or cash-flow notes like other states.
Outlooks on the state’s triple-A ratings remain stable.
“Utah’s rating and outlook reflect conservative debt and fiscal policies, which have kept debt levels moderate and quickly amortizing and have allowed for successful and timely action when addressing budgetary imbalances,” noted Fitch Ratings analyst Karen Krop. “Longer-term prospects for the economy are for ongoing expansion and diversification and recent growth has been strong.”
After this deal, net tax-supported debt of approximately $3.6 billion will equal 3.8% of 2011 personal income. And more than 75% of that debt matures in 10 years.
“Although debt levels are increasing, particularly with the heavy issuance in recent years of GO bonds for transportation purposes, debt continues to represent a moderate burden on resources,” Krop wrote in her rating report.
After this issue, the state is close to exhausting its highway issuance authorization with about $64.4 million remaining.
To keep pace with the need for roadways and mass transit, Utah public policy groups are urging state and local leaders to consider new sources of revenue, including tax increases or new systems to levy fees for miles traveled.
“Over the next three decades, Utah’s population is set to increase by over 60% from 2.8 million to 4.5 million,” according to a recent report from the Utah Foundation. “From 1990 to 2010, vehicle miles traveled outpaced the population increase by 18%. In order to manage these increases, Utah’s transportation infrastructure will require considerable attention and investment.”
The Utah Department of Transportation’s largest expense is for debt service, followed by roadway rehabilitation and preservation projects, according to the report. UDOT received $1.2 billion in revenue from all sources, including federal funds, in fiscal year 2013.
Longer maturities are discussed as one option for increasing funding for the state’s highway system in the Utah Foundation report.
“Longer debt terms for highway projects would allow the current level of annual debt service expenditures to finance a larger portfolio of capital projects,” according to the report.
In 2011, Utah issued $600 million in previously authorized bonds at a 2.78% true interest cost. That year, all three rating agencies pointed out Utah’s increasing debt levels, the report said.
“Per-capita general obligation debt is at a historical high, Utah reached 87% of the constitutional debt limit in 2012 as a result of increased bonding for highway projects and a decrease in property value,” the foundation report said.
Transportation projects have had the most influence on the constitutional debt limit in recent years, with debt funding transportation projects from fiscal year 2009 through FY 2014 allowing the state to triple capital expenditures during the recession, bolstering Utah’s economy at the time, the report says.
According to the Legislative Fiscal Analyst’s Office, transportation revenues will be sufficient to pay debt service on existing and anticipated bonds, but do not support additional bond- or cash-funded highway projects until fiscal year 2015.
While Utah has avoided toll roads and public-private partnerships to meet the need for new highways, that option is available but has limited use, according to the Utah Foundation.
“Because only a small portion of the urban road system can support tolling, it cannot be used to price individual segments across a road system to encourage heavy vehicles to use appropriate facilities, discourage commuters from traveling through residential areas, or encourage use of fuel-efficient vehicles,” the report said.
As economic conditions improve, Utah expects revenues to grow for the fourth consecutive year in fiscal 2014, according to Moody’s Investors Service. The major tax revenues for the state’s two main operating funds, the general fund and the education fund, are estimated to have grown 6.7% in fiscal 2013 and are expected to increase another 2.6% in fiscal 2014.
The positive trend represents a rebound from three consecutive years of declines starting in fiscal 2008 due to the recession.
State officials expect to end fiscal 2013 with a surplus between $135 million and $195 million.
Moody’s analyst John Lombardi said the state was well prepared for sequestration of federal funds. State agencies were told to prepare plans well in advance of federal cuts. The agencies are required to present plans for expenditure reductions of 5% to 25%, and to update them annually. About a third of Utah’s total funds budget comes from federal funds.
A state report on federal sequestration shows that it is facing roughly $32 million in federal grant reductions during federal fiscal year 2013, which overlaps with the state’s 2013 and 2014 fiscal years. The largest reductions were in education and employment and training at approximately $15 million and $4 million, respectively.
State officials indicate there could be additional reductions beyond those in the report, according to Moody’s. The state has no plans to replace the lost federal spending.
One factor contributing to the improving revenues is a new defined contribution benefits program for state employees that replaces a defined benefits program. As employees retire, the cost of the new program will be offset by savings from the old program.
Several retirement plans cover state employees, public education employees, police, firefighters, governors and legislators. Funded levels have dropped from more than 100% before the recession to 79% in 2011, according to Moody’s.
“However, Utah fares well relative to other states in our calculated adjusted net pension liability metric at 30.8% of all governmental funds revenues, as of the fiscal year ended June 30, 2011,” Lombardi noted.
Utah’s approach to funding its OPEB liabilities also contrasts with most states, Lombardi said. Starting in 2006, the state began to phase out post-employment retiree health and life insurance, and changed the treatment of unpaid sick leave, which now is converted into a health reimbursement account.
“These actions reduced its liabilities going forward, and in 2007 the state established an irrevocable trust to pre-fund its OPEB costs, and has appropriated the actuarial required contribution to it every year since then,” Lombardi said.