Ohio refunding will scoop and toss for coronavirus budget relief
Ohio will “scoop and toss” some of its bond principal payments with a general obligation refunding deal as the state navigates pandemic-induced revenue losses.
The $779 million of Ohio Public Facilities Commission refunding bonds pricing Wednesday will provide both present value savings and near-term debt payment relief for the state government.
It's split into $492 million of taxables and $287 million of tax-exempts. The bonds carry a general obligation pledge of the state excluding lottery proceeds.
The state took indications of interest on the taxables Tuesday and will price both pieces of the deal Wednesday.
Loop Capital Markets, a minority-owned firm, has the books and Morgan Stanley is a co-senior manager. The state has tapped minority-owned firms to lead sales before, but the issue is the largest so far, state budget officials said.
The deal is structured to achieve significant net present value savings while also pushing out about $355 million of principal due in fiscal 2021, a one-time “scoop and toss” measure to help manage through the pandemic’s impact on state revenues. The state is facing a $2.4 billion gap in the fiscal year beginning July 1.
Ohio did not receive pushback from the rating agencies for scooping and tossing. Fitch Ratings and S&P Global Ratings affirmed the state’s AA-plus ratings and Moody’s Investors Service affirmed the state’s Aa1 rating. All assign stable outlooks.
“Fitch views this type of ‘scoop and toss’ restructuring as a reasonable budget balancing measure to address the severe and rapid decline in revenues associated with the pandemic. It is not expected to increase Ohio's overall liabilities or negatively affect the state's overall debt structure,” the rating agency said.
The facilities commission already planned a taxable refunding this year after identifying a good number of candidates in its debt portfolio that could generate sizable present value savings, but the onslaught of the pandemic and sting to state revenues due to the economic shutdown and ensuing recession drove the structuring.
“Due to the budgetary impact of coronavirus pandemic, we saw an opportunity to restructure upcoming principal payments due between August 1, 2020 and September 15th for immediate cash flow savings,” Pete LuPiba, deputy director in the Ohio Budget and Management Department, said in an email.
The state has restructured debt previously during times of extraordinary economic circumstances for cash flow relief with four transactions completed between 2009 and 2012, LuPiba said.
The majority of the savings on the tax-exempt issuance are taken between 2021 and 2028 while the cash flow relief from the restructured payments occurs in fiscal 2021.
Easing the overall impact of the debt relief on the commission’s portfolio is the significant present value savings of the refinancing — $109 million or 13.9% based on the latest figures — and the quick repayment of debt pushed off within the next decade.
Debt service is lowered to $1.06 billion in fiscal 2021 and then rises to $1.33 billion in fiscal 2022 and then resumes a downward trend with most of the restructured debt service paid off between 2022 and 2027.
Moody’s said a small selection of maturities accounting for less than $60 million will be extended three years past the current final maturity but it “will have minimal impact on the average maturity of the state's total debt portfolio” and while “a portion of the current refunding is restructuring debt service for budgetary relief rather than for savings, the net impact” results in double digit net present value savings.
Pew Charitable Trusts researches in a report published June 9 said they expect states to consider borrowing to manage the pandemic’s impact, noting the limitations and warning that budgets will still need adjusting.
“Despite the limitations of borrowing, the current crisis presents such a challenge to state finances that policymakers will likely need to employ a range of tools to weather the storm. Although state rainy day funds, on average, are in better shape now than going into the Great Recession, they will not be enough for most states. Borrowing then may need to be one part of a package of state budget and policy responses,” the report said.
Ohio lacks the constitutional authority to issue deficit bonds so restructuring is one of the few debt tools the state has to manage fiscal strains and it’s just one piece of the fix for fiscal 2021 as the state has already begun to cut spending and has healthy reserves.
“The state is precluded by its constitution from ending a fiscal year or a biennium in a “deficit” position and the restructuring is just one of several tools the state has available to reduce the anticipated budget shortfall,” LuPiba said.
Gov. Mike DeWine in May cut $775 million from the fiscal $34 billion 2020 budget with hits to Medicaid, education, and state agency budgets. The state is also implementing a freeze on hiring and equipment purchases and ordered a review of contracts for potential savings.
“If we do not make these cuts now, over the next two months, the cuts we would have to make next year would have to be more dramatic,” DeWine said in May.
Lawmakers gave the governor authority in March to draw on the state’s reserves to help clear out the fiscal 2020 hole but the governor instead ordered the cuts, leaving the reserve to potentially help with the fiscal 2021 dip in revenues. DeWine has said he is willing to tap the reserve but won’t drain it.
The state has a $2.7 budget reserve equal to 8% of general revenue funds and a nearly $500 million fund balance. The state operates on a fiscal biennial and passed the 2020-2021 budget last year.
Based on figures through May, revenues for fiscal 2020 are down 4.9% or $1.05 billion below budget with income taxes down by 9.75% and sales taxes down 3.3%. May monthly collections fell 13% over budgeted levels and were down 15.6% from May 2019. General revenue funds for the fiscal 2021, the second year of the biennium, were lowered by $2.4 billion.
Earlier this month, DeWine announced additional actions including pay cuts for cabinet directors, furloughs for some other employees, and froze pay and step increases for some employees. Negotiations with state unions began this week in an effort to identify potential collective bargaining savings.
Under the federal Coronavirus Aid, Relief and Economic Security Act enacted on March 27, Ohio received $4.5 billion in direct aid with $3.7 billion going to the state and the balance to eligible local governments. The state implemented closures of non-essential businesses and banned large gathering in March with a phased-in reopening beginning early last month.
“We do not see any material immediate credit risks for the State of Ohio, however, the situation surrounding coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis,” Moody’s said.
The state has $9.4 billion of general revenue fund supported debt, $1.9 billion of appropriation-backed debt, and $1.2 billion of authorized but unused new money GO issuance authority.
S&P said it considers Ohio to have elevated social risks given demographic pressures of the state's aging prime working-age population and low replacement rates statewide but the state benefits from historically strong management and economic diversification efforts help manage those risks.
"While our outlook horizon is up to two years, given the fluid nature of developments relating to the direct and indirect financial and economic challenges of COVID-19 pandemic over the near-term, we will continue to actively assess the implications to Ohio's credit fundamentals and debt obligations over the outlook period," said S&P analyst Thomas Zemetis.