Iowa Heads to Market With Annual $500 Million Tran Deal to Pay Bills

CHICAGO — Iowa enters the market today with $500 million of tax and revenue anticipation notes — an annual outing that allows the state to pay its bills on time as tax revenues flow into state coffers during the second half of the fiscal year. Morgan Stanley is the underwriter and Public Financial Management Inc. is financial adviser. The Trans mature June 30. Proceeds will allow the state to smooth out its payment schedule on bills with its revenue flow — a discrepancy that becomes most acute in April when the state experiences a gap of about $291 million. The notes are a contractual obligation of the state and carry a lien on available tax and revenue collections in the general fund, which are expected to total $9.3 billion in the current fiscal year. Iowa sold $450 million in fiscal 2006 and $500 million in fiscal 2007, when it captured a yield of 3.53%. With little other debt planned in the near term, the notes offer the only state paper for investors to purchase in the primary market for some time. “There’s no definite plans for any new borrowing in the current budget,” said state Treasurer Michael Fitzgerald, whose office manages the issue. The deal captured the top short-term ratings from Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s based on the state’s pledge of available general fund revenues, strong credit, and successful track record repaying past short-term financings. Moody’s assigns a Aa1 issuer rating to Iowa, while Fitch and Standard & Poor’s assign an implied general obligation rating of AA-plus, as the state does not issue stand-alone GO-backed debt.Though Iowa’s fiscal position remains strong, it does face some ongoing challenges, including its continued use of one-time revenue streams to cover expenses, which leads to a structural budget imbalance. One-time revenues of $197 million were used in the fiscal 2008 budget compared to $226 million in fiscal 2007, and $289 million in fiscal 2006. The general fund cash balance expected at the close of the current fiscal year is $164 million, lower than recent years due to increased spending on economic development programs, education, agriculture, and natural resources in the current budget. Revenue so far this year has grown by 7.7% over last year with personal income taxes and corporate income taxes both up 8%. More modest growth of 2.9% in revenues is expected in the next fiscal year.The state economy also lags the national trend in the area of personal income growth, although its economy continues to diversify, adding more than 22,000 jobs in the last year fueled by new positions added in the growing insurance industry.Iowa’s debt levels remain among the lowest in the nation. Its pension fund is funded at an 84% ratio and the state has reported an unfunded liability for other post-employment benefits of only about $219 million, a favorable position compared to other states that are facing mammoth liabilities related to retiree health care benefits, according to analysts. The treasurer’s office last week released a report showing that the state and local governments in Iowa had a total of $10.3 billion of outstanding debt last June, an increase of 8.85% from last year. City obligations grew by the most — 38% to $4 billion, with utility and sewer projects representing 28% and general obligation borrowing making up 62%. School borrowing grew by 9.79% as “several growing school districts issued debt for new school building construction,” Fitzgerald said. County debt increased by 19.4%, with the largest hike seen by Polk County, which includes Des Moines.