WASHINGTON — Triple-A rated Maryland Friday will begin selling $489.8 million of general obligation bonds, including Build America Bonds and other school-related bonds created by the stimulus act.
Pricing for retail will run from today through Tuesday for $200 million of Series A tax-exempt bonds. The state will competitively sell $289.8 million of taxable and tax-exempt bonds on Wednesday.
The negotiated Series A bonds are expected to mature in three to eight years. The $165 million of competitive tax-exempt Series B bonds are scheduled to mature between 2013 and 2021, but the maturities are subject to change based on the sale of the negotiated bonds.
The $75 million of Series C direct-pay BABs will mature between 2022 and 2025 because the state’s constitution limits the maturities of bonds to 15 years.
Patti Konrad, the state’s director of debt management, acknowledged that Maryland’s constitutional limit curbs the potential savings the state might achieve if it could issue BABs with a longer maturity. Issuers typically have sold BABs with long-term maturities to capitalize on the savings provided by the 35% federal subsidy.
“We recognize that perhaps there is savings beyond 15 years” for BABs, Konrad said, but there is “no flexibility” on the maturity cap. The rating agencies look favorably on the state’s quick amortization, she added.
Moody’s Investors Service said in a ratings report that the 15-year maturity cap “quickly replenishes the state’s debt capacity” and offsets the high debt level, which is above the 50-state median.
The state is also rated triple-A by Standard & Poor’s and Fitch Ratings.
Proceeds from the BABs and tax-exempt bonds will be deposited in the state’s facilities loan fund and will be used for a variety of projects.
This deal also will include the allocation of qualified school construction bonds that Maryland received for the year. The state expects to issue $45.2 million of direct-pay qualified school construction bonds for nine schools. The QSCBs will mature in 2025.
Maryland will also be issuing $4.5 million of direct-pay qualified zone academy bonds. It has elected to receive subsidy payments from the federal government rather than having the bonds provide tax credit to investors. The state is taking applications from 24 education providers for the proceeds of the QZABs, which also will mature in 2025.
Citi and M&T Securities Inc. are the lead underwriters for the negotiated Series A tax-exempt bonds with Bank of America Merrill Lynch, RBC Capital Markets, Siebert Brandford Shank & Co. Barclays Capital, Goldman, Sachs & Co., JPMorgan, Loop Capital Markets LLC and Morgan Keegan & Co. serving as co-underwriters.
Ballard Spahr LLP is the bond counsel and Miles & Stockbridge PC is advising the underwriters.
Maryland closed a $2 billion budget gap for its fiscal 2011, which started July 1. Rating agencies expressed concern that the state may face greater budget hurdles in the years to come as federal stimulus funds disappear.
The state cut $1 billion in spending to local governments and higher education. It also transferred more than $800 million to its general fund from other state funds, according to Moody’s.
Additionally, Maryland has tapped reserves to balance the budget. The state’s reserve stabilization account has declined to 5% of revenues for fiscal 2011. In fiscal 2007, the state had reserves of 11% of revenues, Moody’s said.
The state also has been relying on $389 million of enhanced matching federal funds under the Federal Medicaid Assistance Percentages program. But Congress failed to extend the program to June 30, 2011, as many states expected. Maryland can transfer about $200 million to the general fund to cover any loss in FMAP funding, according to Maria Coritsidis, the lead analyst for Moody’s covering the state.
Maryland’s retirement system funding has also raised concerns among rating agencies. The state had funded about 65% of its liabilities as of June 30, 2009, down from 78.6% the year earlier, according to Moody’s. Compared with the other triple-A states, Maryland pension funding “is on the lower end,” Coritsidis said.
This year, the General Assembly failed to pass legislation that would have passed its pension obligations for teachers to local governments. The state, however, established a pension sustainability commission, and an initial report is due before the end of the year.
“We’re looking to see how the state attempts to address the issue,” Coritsidis said.
Despite the concerns, Maryland enjoys a strong economy that has benefited from government jobs located in and around Washington, D.C. The state’s June unemployment rate was 7.1% compared to the national average of 9.5%. Maryland’s per capita personal income ranks fourth among states, according to Fitch.