Forward Metro St. Louis Presentation On Missouri Fifth State Building Bond Issue James R. Moody & Associates September 2009 1James R. Moody & Associates

Forward Metro St. Louis Forward Metro St. Louis Presentation On Missouri Presentation On Missouri Fifth State Building Bond Fifth State Building Bond IssueIssue

James R. Moody & AssociatesSeptember 2009

1James R. Moody & Associates

It is fairly easy to find total debt in Missouri’s financials, but you have to go to Note 5 of the Missouri CAFR to find assets.Missouri has total debt of $3.8 billion; assets are based on historical cost and exceed $100 billion before depreciation. If Missouri was an individual we would be considered wealthy.

How Much Is This Building Worth?


Missouri Has Been A Conservative and Missouri Has Been A Conservative and Fiscally Responsible BorrowerFiscally Responsible Borrower

General obligation debt only for state building projects and water pollution and stormwater control projects with borrowing approved by voters

Pledge of appropriation debt for certain state buildings and prisons, and revenue bonds issued by the Board of Public Buildings

No bonds or notes used to pay normal operating costs of government, unlike other states

GO bonds rated triple AAA, another indicator of good financial management

Current on actuarially required contributions (ARC) for pension systems which are a state responsibility.


Normal Types Of Normal Types Of Governmental BorrowingGovernmental Borrowing

General Obligation Bonds (voter approved)

Revenue Bonds With Earmarked Revenue Source (MODOT bonds)

Pledge of Appropriations Bonds (revenue bonds backed by pledge of appropriation)

Short term borrowings (revenue anticipation notes --RANS, tax anticipation notes--TANS)


Bad Borrowing Techniques Bad Borrowing Techniques Used By Other StatesUsed By Other States

Issuing state debt to pay ongoing operating expenses

Sale of toll road (Indiana turnpike)Sale and leaseback of existing state

buildings (Arizona)IOU’s (California)Underfunding actuarially required

contributions (ARC) to pension systems which are the responsibility of the state (Illinois, other state and local governments)


A Few CaveatsA Few CaveatsBonded indebtedness should not be

utilized to pay ongoing operating expenses

That is similar to using your credit card to pay for ongoing operating costs of living

If you support a bond issue, it should be only for capital improvements, and not allow Missouri to fall into the gimmicks other states have used

James R. Moody & Associates 6

Whether To Issue Bonds Is Similar Whether To Issue Bonds Is Similar To Decisions Made To Expand Your To Decisions Made To Expand Your

BusinessBusinessHow much can you affordWhat is the term of the loanFixed rate or variable rateSerial payments or lump sumWhen can you refinance or pay

down debt


Missouri’s General Obligation Missouri’s General Obligation DebtDebtThird and Fourth State Building

BondsWater Pollution Control BondsStormwater Control Bonds


Missouri Bonded Debt By Missouri Bonded Debt By CategoryCategory

Principal Outstanding

Per Capita Debt

General Obligation $666.5 million $101.51

Board of Public Buildings

$623.3 million $105.44

Other $253.3 million $42.84

MODOT $2.355 billion $398.53

Total $3.832 billion $648.32


Missouri’s Per Capita Debt Missouri’s Per Capita Debt Compared To Other StatesCompared To Other States

Missouri shows up 22nd in the country in per capita debt, but the majority of that debt is MODOT debt backed by an earmarked MODOT revenue stream.

Missouri’s non-MODOT per capita debt of $249.79 is relatively low, and not of major concern to the debt rating agencies


Arbitrage IssuesArbitrage IssuesArbitrage is whether borrowed funds can be

invested at a rate above or below the borrowing rate.

Positive arbitrage means the funds are invested at a rate above the borrowing rate.

Negative arbitrage means the funds are invested at a rate below the borrowing rate.

Based on current market conditions, the State will almost certainly face negative arbitrage, which means funds should not be borrowed until expenditures are very near.

This would mean that a series of bond issues similar to the Third State Building Bonds might be necessary.


Third State Building Bonds Third State Building Bonds IssuancesIssuances

Series and Year of Issuance

Dollar Amount Of Issuance

Series A 1983 $40 million

Series B 1983 $35 million

Series C 1984 $50 million



Series B 1987 $75 million

Total $600 million


General Obligation Bonds General Obligation Bonds Must Be Voter ApprovedMust Be Voter Approved

Third State and Fourth State Building Bonds both narrowly passed a vote of the people. (Third State was a June election, Fourth State an August election).

Governor Nixon wants to push an aggressive timeframe, which would probably mean a special election.

Conventional wisdom is that issues such as these (and such as tax increases) can only pass at a statewide primary or general election, which means August 2010 or November 2010. This timeframe does not meet Governor Nixon’s goals.

An aggressive campaign will be needed to convince voters of the needs.


Steps In The Approval Steps In The Approval Process To Issue BondsProcess To Issue Bonds

Passage of a bill calling for a referendum by the General Assembly

Passage of the referendum at a public vote

Appropriation of funds for debt serviceBond IssuanceCurrent authorization for Build

America Bonds expires at the end of calendar year 2010.

In a best case scenario a referendum would happen by April 2010.


How Much Is Debt Service and How Will We Find The

MoneyA general rough rule of thumb for estimating annual debt service payments is about 6%. For example, if $100 million is borrowed, principal and interest annual payments would be around $6 million.

Governor Nixon has said that debt service will be paid by reductions or offsets in operating budgets.

Rates are creeping up a little, but the borrowing environment is still good compared to historic interest rates.


Problems With Passing Fifth Problems With Passing Fifth State Building BondsState Building Bonds

Governor Nixon would like legislative consensus. It does not seem to be there yet.

Governor Nixon would like that consensus to be on both the idea of borrowing and the elements of the package.

Nixon approach would likely combine withheld stabilization projects, some higher education, converting some leased buildings to owned, some mental health projects, possibly buildings at old JC Penitentiary site, possibly some transportation funding, also public safety infrastructure. Can that package gather consensus?

Doing a package quickly even with consensus could be a challenge.


Timing of Bond Issuances Timing of Bond Issuances and Budget Impactsand Budget Impacts

If authorized, the Fifth State Building Bonds will be issued over a number of years, similar to the Third State Building Bonds

The budgetary impacts would also therefore be spread over a number of fiscal years. Debt service would only be necessary after the bonds are issued.

Debt service would probably not begin for a few years, which might coincide with revenues growing again.


What Type of Bonds Will Be What Type of Bonds Will Be UsedUsed Initial bonds might be Build America Bonds, dependent and

contingent upon when voter approval occurs. Build America Bonds are taxable but with a 35% federal

subsidy on interest cost. Build America Bonds authorization currently expires on

January 1, 2011, so the current window for Build America Bonds is narrow, thus the desire for fast action by the Nixon administration.

After Build America Bond authorization expires, tax-exempt bond issuance will probably be used.

Nixon administration is also considering possible use of Economic Recovery Zone Bonds and Energy Efficiency Bonds. The use of Economic Recovery Zone credits makes sense, as they have a 45% interest subsidy.

Nixon administration is working on accumulating unused Economic Recovery Bond authorization statewide.


SummarySummary Voter approval is a major hurdle, but getting

legislative consensus may be a larger hurdle. A package will move forward only with consensus,

and nothing will move until after veto session in mid-September.

Therefore no special session during veto session to consider Fifth State.

Missouri has the capacity to do more debt without impacting its “triple AAA” rating status.

Budgetary issues exist but could probably be managed.

Increased debt service would be spread over a number of future operating budgets.

Make sure bond proceeds are not used to subsidize the operating budget.


Documents

Forward Metro St. Louis Presentation On Missouri Fifth State Building Bond Issue James R. Moody & Associates September 2009 1James R. Moody & Associates