WASHINGTON — South Carolina this week will competitively sell $324 million of new-money and $336.5 million of refunding general obligation bonds, foregoing Build America Bonds partly because of a growing concern that federal lawmakers or regulators could lower the subsidy rate or actual payments.
South Carolina Treasurer Converse A. Chellis said in an interview that the state declined to price any portion of the deal as BABs partly because “there’s no guarantee” that the 35% direct-pay federal subsidy rate will remain safe from political intrusion during the life of a BAB.
Additionally, he said the Internal Revenue Service “has stated that it may block subsidies if an issuer owes the federal government for other programs.”
The federal interference concern was one of several Chellis expressed with BABs. He said he “philosophically” questions the cost BABs may contribute to the federal deficit.
Chellis also said BABs are not a good option for South Carolina because their higher, taxable interest rate would consume more of the state’s debt limit than tax-exempt interest costs.
South Carolina is constitutionally required to limit its maximum annual GO debt service to 5% of prior year general fund revenue, and 6% when including certain economic development and some university debt.
The higher actual interest cost associated with BABs would deplete the state’s debt capacity, Chellis said.
States are accounting the BABs’ federal subsidy in “all different ways,” said Fitch Ratings’ Alexandra Edwards, who covers South Carolina.
The state’s debt limit was not designed to include the federal subsidy revenues, which would “crowd out” some of the state’s debt issuance, she said.
South Carolina became the third issuer in as many weeks to swear off BABs because of concerns about federal interference.
Last week, Florida bond finance director Ben Watkins said the state postponed a new-money competitive deal scheduled for this week until Washington clarifies if the IRS could intercept subsidy payments if an issuer has outstanding payments due to the federal government for Medicaid, unemployment compensation or any other federal program.
Watkins concerns rose after an IRS attorney said at a bond lawyers’ meeting in California last month that the Treasury’s BAB subsidy payments are automated and would be reduced, without any input from Treasury or IRS officials, if the issuer owed the federal government any money.
Twenty-three states had issued BABs at the state level plus the District of Columbia through March 18, according to Thomson Reuters data.
Also last week, Orlando-Orange County Expressway Authority chief financial officer Nita Crowder said the agency did not include BABs in a recent transaction because of concerns about relying on the subsidy as well as not having to comply with additional reporting and audit requirements.
South Carolina plans to issue $170 million of Series 2010A economic development GOs, the state’s first deal since last June, on Tuesday, along with two $50 million series of GOs, Series 2010A of air carrier hub terminal facilities bonds and 2010B of economic development debt.
All three new-money series will be used to pay part of the cost association with a new Boeing Co. facility in North Charleston and will have maturities between one and 15 years. Haynsworth Sinkler Boyd PA is the bond counsel for all of the bonds.
In October, the state announced that Boeing’s North Charleston location would open a second production line for the 787 Dreamliner aircraft. Construction on the facility is underway and expected to be completed in 2011, Chellis said.
The state Wednesday also plans to issue competitively $54 million of GO bonds for Coastal Carolina University to finance capital projects. The bonds will have maturities of one to 20 years.
On Thursday, South Carolina plans to competitively price $336.5 million of Series 2010A GO state highway refunding bonds to refund GOs issued in 1999 and 2001.
The refunding will have an estimated present value savings of $32 million, according to Standard & Poor’s, and the bonds will have maturities of one to 11 years.
Nexsen Pruet LLC is bond counsel for university new money and state refunding transactions.
All series are rated Aaa by Moody’s Investors Service, AA-plus by Standard & Poor’s and AAA by Fitch Ratings.
South Carolina’s financial management continues to be “a real strength” for the credit rating, Fitch’s Edwards said. The state’s willingness to cut spending is a strength “we don’t see terribly often,” she added.
However, the state’s unemployment rate, which at 12.6% in January was the fourth highest among states, is a risk, Edwards said.
Another credit analyst raised concerns with the state’s pensions and other post-employment plan liabilities. Combined, South Carolina’s retirement system plans were about 70% funded as of June 30, 2009, according to a Moody’s report.
The 70% funded ratio is the lowest among triple-A states rated by Moody’s, said Ted Hampton, the agency’s lead analyst on the state.
He said he expects the state to “adhere to its tradition of fiscal management,” and is “confident” it will deal with its long-term pension liabilities.
The state faces a projected $1.4 billion budget gap for fiscal 2011 that is expected to be closed with spending cuts.