Pennsylvania on Wednesday will take bids on $650 million of general obligation debt, including $466 million of taxable Build America bonds.
The sale comes after officials last week agreed to reduce the size of the offering from the $1 billion originally planned for November.
Issuing fewer bonds will not cancel or delay any capital projects, though it will require the state to return to the bond market sooner, said Rick Dreher, director of the bureau of revenue, cash flow and debt.
“The $650 million level we can support,” Dreher said. “It would not reduce the number of projects that we fund, it would simply mean that we’ll be back to the market probably in the April time frame instead of June, when we originally planned to come back to the market.”
Treasurer Robert McCord last week announced that he would sign off on a smaller, $650 million borrowing after refusing to approve the planned $1 billion issuance set for Nov. 10. McCord, a Democrat, questioned issuing $1 billion of debt during a gubernatorial transition. Republican Governor-elect Tom Corbett will take office on Jan. 18, as Gov. Edward Rendell, a Democrat, will be termed out.
“A billion dollars in debt would not have been appropriate, and I will not approve such an offering,” McCord said in a statement. “But neither, in my judgment, would it be appropriate to issue zero debt, and in so doing risk a winter shutdown of ongoing infrastructure-improvement projects — job-producing projects that are an important component of our fragile economic recovery.”
Pennsylvania can issue debt with authorization from the governor and either the treasurer or the state’s auditor general. Historically all three have signed off on borrowings. This will be the first time since the 1970s that the state will sell GO bonds with only two officials approving the transaction — Rendell and McCord, according to Dreher. Auditor general Jack Wagner last week said he would not approve the $650 million sale as it will increase the state’s outstanding debt.
Pennsylvania has about $9 billion of outstanding GO bonds.
McCord said he spoke with Corbett’s transition team to get a sense of what level of borrowing he would approve. Corbett spokesman Kevin Harley said the incoming governor did not want the state to face potential lawsuits by postponing the bond sale further, which would have halted some construction projects that are under contract.
“Governor-elect Corbett is not saying that he agrees or approves with the merits of the projects,” Harley said in a phone interview. “But by simply rejecting the entire bond, that would have undoubtedly opened up the state to significant breach of contract lawsuits.”
The commonwealth was set to issue $1 billion of tax-exempt bonds and BABs on Nov. 10 but halted the deal once McCord and Wagner said they would not sign off on the sale.
The transaction includes $466 million of taxable Series 2010B BABs maturing annually from 2019 to 2030, according to the preliminary official statement. The two tax-exempt series include $171.8 million of Series 2010A bonds, with serial maturities from 2012 to 2018, and $11.5 million of Series 2010C bonds with debt maturing annually from 2012 to 2030.
While McCord’s announcement last week allows Pennsylvania to utilize the federal BAB program before Dec. 31 — when it is set to expire, unless Congress extends it — the delay means the state will pay more to borrow. U.S. Treasury yields have increased since Nov. 10. Yields on the 10-year, 15-year, and 20-year Treasuries were 3.30%, 3.86%, and 4.14%, respectively, on Dec. 10, according to Thomson Reuters. Those prices are 64, 41, and 29 basis points higher than on Nov. 10.
Municipal issuers are rushing to sell BABs before Dec. 31 in order to receive the 35% federal subsidy on interest costs. Dreher believes Pennsylvania, rated double-A, will stand out among the crowd.
“There is a concern about the volume and the potential impact on our pricing,” Dreher said. “The feedback that we’re getting from folks is that the larger issuers with well-established names — and I’d like to think the commonwealth would be one of those type of entities — are still pricing well even though there is substantial volume at this time in December.”
