Maine Gov. Paul LePage wants voters to approve all bonds backed by the state's moral obligation pledge.
LePage became governor in January 2011 and the next month said that Maine's constitution prevented him from putting the state's moral obligation behind bonds without voter consent.
Since LePage's decision, some Maine authorities have found ways to avoid facing referendums, according to Mary Small, chief of staff to Senate President Kevin Raye. But it is costing them more to borrow.
An example of this is the Maine Health and Higher Education Facilities Authority. As part of the process under the Tax Equity and Fiscal Responsibility Act of 1992, 501(c)(3) nonprofits must get approval of the top government official in their state for bonds, said Robert Lenna, the MHHEF's executive director. Until LePage, the Maine governor would not only approve the bonds but also place the state's moral obligation behind them. Now LePage just does the former.
There are only three double-A rated health or higher education organizations in Maine. The rest are rated lower or not at all, Lenna said.
In the old system, lower-rated organizations could use Maine's double-A rating because the state had put its moral obligation on the bonds, Lenna said. Now these organizations still use the authority to get their funding, but rely on their own credit. Accordingly, they generally have to pay higher yields on their bonds, he said.
"To the extent that we could have previously reduced capital costs for hospitals, [LePage's new policy] is a concern," Lenna said.
The state's nonprofit colleges and hospitals have not tried to gain referendum approval for their debt for three reasons: referendums cost the state money, the state Supreme Court said the moral obligation is not a legal obligation, and the delay of six to 12 months that a referendum imposes is impractical. The organizations first have to get a bid from a building contractor before deciding on how much to ask for in a referendum, Lenna said, and no contractor is going to be willing to hold their bid for that long.
In the last 10 years, Lenna's authority has issued $2.06 billion of bonds.
However, a Maine college student loan agency has decided to go forward with seeking the referendum. The Maine Educational Loan Authority acts as a supplemental loan agency. It provides loans to resident students who attend college in or out of state and nonresident students who attend college in Maine. In the last 10 years, it has issued $334 million.
Before LePage's term, voters were not asked to approve moral obligation bonds, said Shirley Erickson, executive director of the Maine Educational Loan Authority. The agency will be the first authority spurred by LePage's new policy to seek voter approval.
With support of the governor and Raye, SP 561 is advancing through the Senate. If approved by both chambers, voters will weigh in on the referendum in November. The referendum would read: "Do you favor the governor's approval of the Maine Educational Loan Authority's issuance of no more than $50,000,000 of tax-exempt student loan revenue bonds over the next three years, to be repaid by the loan recipients?"
The bill states: "Federal law requires that private-activity bonds, which are tax-exempt bonds issued by public entities to provide low-cost financing for private projects that serve a public purpose, be approved by the highest elected official of the jurisdiction in which the proceeds of the bonds will be used."
The measure should have an easy time passing the legislature, Small said.
The educational authority loaned $12.9 million in 2010 and $11.4 million in 2011, Erickson said. It has $143 million in outstanding loans. The annual gross student default rate is 0.87%.
The authority offers a loan for college education at a 7.75% fixed interest rate for the full cost of education minus financial aid. It also offers a loan for graduate medical and veterinary studies at 7.75%.
Moody's Investor Services rates the educational authority's bonds A2 with a stable outlook.
Standard & Poor's last report on the authority was in July 2010. It assigned an A with a negative outlook to the Series 2010 revenue bonds. "The rating reflects what we view as the state of Maine's moral obligation pledge to replenish any insufficiencies in the Maine Educational Loan Authority's capital reserve fund," S&P said.