DALLAS — The Kansas Department of Transportation will begin a $1.7 billion bond financing for the state's new transportation plan with today's negotiated sale of $325 million of taxable Build America Bonds.
The sale is the state's first issue of new money for transportation projects since 2004.
The 10-year Transportation Works for Kansas program, approved by the Legislature in May, allows KDOT to issue bonds totaling up to 18% of its annual revenue.
Based on projected revenues, KDOT expects the new bond cap would support a total of $1.7 billion of bonds over the 10-year period.
"It could be more or it could be less, depending on the actual revenues and project needs," said Reed Davis, economic analyst manager for the department.
KDOT projections include a high estimate of up to $2.2 billion of bonds for the program, if the agency's annual revenue is above expectations.
Legislation that authorized the earlier 10-year transportation plan, which expired in 2009, included a specific amount of debt that could be issued for the program.
The 18% level will allow greater flexibility in financing the transportation program than did the hard cap, Davis said.
"We had a limit on bonds in the legislation that passed in 1999, and we sold all the debt authorized under that program by 2004," he said. "This new approach will allow us sufficient funds to deal with economic development projects as they emerge over this period."
The 25-year revenue bonds are rated AAA by Standard & Poor's, Aa1 by Moody's Investors Service, and AA-plus by Fitch Ratings.
Barclays Capital is the lead underwriter on the issue. Co-managers include Bank of America Merrill Lynch, Citi, Fidelity Capital Markets, George K. Baum & Co., JPMorgan, Morgan Stanley, Valdés & Moreno Inc., and Wells Fargo Securities. Public Financial Management is KDOT's financial adviser. Bond counsel is Gilmore & Bell PC.
The department has $1.57 billion of outstanding debt. Existing debt includes $899 million of fixed-rate bonds and $664.3 million of synthetically fixed debt.
Kansas will cut its debt-service costs by using BABs rather than conventional tax-exempt revenue bonds, Davis said.
"Based on our analysis of the market, we determined the 35% direct subsidy will give the state a little lower interest rate than we could get with a tax-exempt issue," he said. "I don't think we would have done it if the BABs interest rate subsidy was 30% or 27%, as has been proposed."
Proceeds from today's sale are expected to finance road, rail, transit, and airport projects through mid-2013.
Current plans include bond sales of about $200 million a year from 2013 through 2018, with a final $175 million sale in 2019.
Total financing available for the 10-year T-WORKS program is estimated at $8.2 billion. In addition to the bond funding, other sources include $5.5 billion in existing revenue and $1.5 billion from an increase in the portion of the state sales tax dedicated to the transportation fund.
KDOT officials said they expect the projected $1.7 billion in new debt to provide net revenue of $1.2 billion after debt-service costs are considered.
The revenue stream includes 0.4% of the one percentage point increase in the state sales tax, to 6.3% from 5.3% effective July 1. The overall rate will drop to 5.7% in July 2013, with the 0.4% increase for the transportation program remaining in effect.
The addition of the sales tax to the revenues supporting the bonds is expected to help offset a projected slow growth in fuel-tax collections. The increased sales tax allocation will help raise Kansas' allocation to the highway fund from $727 million in fiscal 2010 to $1 billion in fiscal 2015.
The current motor fuel taxes of 24 cents per gallon for gasoline and 26 cents for diesel is expected to generate $427.5 million in fiscal 2011 and $453 million in fiscal 2015.
Sales tax revenue dedicated to the highway fund — which were $258 million in fiscal 2010 before the one percentage point increase went into effect — are expected to grow from $289.5 million in fiscal 2011 to $497.6 million in fiscal 2015.
Additional revenues also include increases in driver license fees and registration fees for large trucks.
Expenditures under the 10-year program include $4.6 billion for highway maintenance and preservation efforts that will include every mile of existing state highway, $1.7 billion for new and expanded highways, $1.6 billion for county and city road projects, and $186 million for transit, aviation, and short-line rail efforts.
"The new 10-year program will finance 100% of our system preservation needs," said KDOT management system analyst Kyle Malcom.
The department halted all road preservation projects earlier this year due to a lack of funds, but awarded 85 maintenance contracts in June after passage of the new highway plan. It was the largest number of contracts ever awarded in a single month by the agency.
In announcing June's contract letting, Transportation Secretary Deb Miller said the T-WORKS program would enable the state to protect billions of dollars spent on highways over the past 20 years.
"The June letting allows us to get our preservation program back on track with important projects such as overlays, sealing, pavement patching, crack repair and bridge repairs," Miller said.
The current transportation effort is the successor to a 10-year, $13 billion program that was financed with $1.3 billion of highway revenue bonds and $210 million of bonds supported by general fund appropriations.