In the first week of 2009, nobody had heard of Build America Bonds. In the first week of 2010, they rule the municipal bond market.
Some of the biggest bond sales on tap this week are BABs, following a year in which issuers sold $64.15 billion of the experimental bond class created under the American Recovery and Reinvestment Act.
Municipalities are slated to sell $6.74 billion of bonds this week, having sold $3.23 million last week.
The biggest deal by far is Illinois’ $3.47 billion taxable general obligation sale, which will be used to fund the state’s pension obligations.
Goldman, Sachs & Co., JPMorgan, and Loop Capital Markets are managing the deal, with along with co-managers Mesirow Financial, Stifel Nicolaus & Co., and Morgan Keegan & Co., among others.
The deal is broken into five pieces, each with a principal of $693.2 million. One piece will expire Jan. 1 of each year from 2011 through 2015.
The bonds are callable with a make-whole provision.
The proceeds of the sale will be deposited in the state’s Pension Contribution Fund, which funnels payments to Illinois’ five retirement funds for state employees like teachers and judges.
These employees typically contribute a portion of their salaries to a pension plan while they are working, and then enjoy a regular payment in retirement based on a formula.
Under the state’s constitution, pension payments cannot be revoked or diminished once promised.
The state’s five funds have roughly 700,000 members, nearly 400,000 of whom are already retired or otherwise entitled to benefits.
The pension funds have $64.7 billion and are on the hook for $119.1 billion in eventual payments, based on actuarial estimates.
Under state law, Illinois must fund this $54.38 billion gap regularly through 2045.
The state’s underfunded pension funds were the impetus behind Illinois’ $10 billion taxable bond sale in 2003, which remains the biggest taxable deal in municipal history.
“The state’s pension liability, while reduced substantially by the 2003 bond issue, remains sizeable,” Edward Hampton, an analyst at Moody’s Investors Service, wrote in rating the latest offering A2. Moody’s downgraded Illinois last month.
Since 1990, Illinois has enacted three plans to address its underfunded pensions. It has failed to adhere to any of them, Hampton said.
Fitch Ratings assigned an A rating to the state’s offering, while placing Illinois’ $19.4 billion of GO debt on negative watch.
The rating “reflects the magnitude and persistent nature of the state’s fiscal problems,” Fitch said. Illinois has failed to address its “sizeable accumulated deficit” and continues to rely on short-term fixes, the rating agency said.
The state faces a $2 billion gap in its fiscal 2010 budget, or 7% of its general fund resources.
Standard & Poor’s downgraded Illinois to A-plus last month.
Another major deal is the New Jersey Transportation Trust Fund Authority’s $850 million offering, of which $357.9 million will be BABs and the rest will be tax-exempt.
Managed by Barclays Capital, the sale will raise proceeds to finance transportation projects in the Garden State.
The transportation fund is the financing arm of the New Jersey Department of Transportation, which oversees more than 13,500 miles of roads, 2,300 bridges, and the state’s bus and train system.
The transportation fund is one of many state entities New Jersey uses to incur debt without winning voter approval.
Under New Jersey’s constitution, the state must obtain approval by public referendum before floating bonds.
To sidestep this requirement, the state authorizes independent agencies such as the transportation fund to float their own bonds.
That debt is technically an obligation of the transportation fund, and not of the state. The state then transfers money to the fund every year to repay the debt.
Since the transfer of money from the general fund is voluntary, the debt does not qualify as a state obligation and enables New Jersey entities to float bonds without public approval.
New Jersey entities have issued about $29 billion of such debt.
The transportation fund, which disbursed $1.5 billion during fiscal 2009, has about $11 billion of outstanding debt.
Its revenue, which consists almost entirely of appropriations from the state, was $934.3 million last year, enough to cover its cost of repaying debt 1.7 times over.
Moody’s rates the deal A1. The rating is a notch lower than New Jersey’s rating because of the risk that the state decides not to appropriate the money to the transportation fund to repay its bonds.
Another deal of note is the New York Metropolitan Transit Authority’s $350 million BABs sale, managed by JPMorgan and a host of other underwriters. Goldman Sachs is financial adviser. The proceeds will be used to finance transit and commuter projects.
The MTA operates public transportation systems in New York as well as Long Island and parts of the New York City suburbs, with 2.6 billion trips a year. The MTA also oversees seven bridges and two tunnels, carrying 300 million vehicles a year.
The bonds, whose maturities are yet to be determined, are backed by pledged revenue such as train and bus fares, bridge tolls, and state and city subsidies.
The pledged revenue totaled an estimated $8.57 billion in fiscal 2009, enough to cover the cost of repaying debt nearly 14 times over.
The MTA has $20.28 billion in outstanding bonds.