CHICAGO — Iowa will add $25 million of taxable bonds to its planned sale of $155 million of tax-exempt special obligation bonds for its IJOBS program in order to bolster its debt-service reserve on Build America Bonds issued last year for the program and fend off a possible downgrade.
Standard & Poor’s last week put the AA rating assigned to the Series B taxable BABs from the issue last year on negative CreditWatch after it learned the state had not funded the reserve to a level that covered maximum annual debt service.
The rating agency only became aware of the funding discrepancy on the 2009 series after meetings on the upcoming sale with Treasurer Michael Fitzgerald’s office and finance team members.
The state originally planned last year to fund the debt-service reserve on the overall transaction at a level that met maximum annual debt service, or MADS. At the time of pricing, the state altered that plan and instead initially funded the reserve at a level — $14.9 million — that met only the MADS on the tax-exempt tranche.
Like other issuers, Iowa split the deal so that bonds maturing over the first 18 years were tax-exempt and the later maturing bonds were sold as BABs to capitalize on the benefits of the federal program on the longer end of the yield curve.
The state intended to make a $1.3 million annual contribution to the reserve over the first 18 years so that it would be funded at the level needed to achieve MADS on the BABs that carry higher taxable rates. The structure allowed the state to maximize up-front bond proceeds. The BABs mature in 2034.
“Standard & Poor’s said that was not consistent with its criteria for the rating after we met with them on the new sale,” said Stephanie Devin, deputy treasurer for finance. Seeking to avoid a downgrade, the state decided to add $25 million of taxable bonds to its upcoming IJOBS sale to fund the reserve at the higher level.
“We expect to revise the outlook to stable once we receive confirmation that the deposit has been made. Failure to fund the reserve could result in a lowering or withdrawal of the rating,” wrote Standard & Poor’s analyst Helen Samuelson.
Devin said the state hopes to issue the bonds in late September or early October. Bank of America Merrill Lynch is senior manager and William Blair & Co. is co-senior. Public Financial Management Inc. is financial adviser and Dorsey & Whitney LLP is bond counsel.
The bonds will mature serially through 2038. Iowa won’t use BABs again. Fitzgerald said in an earlier interview that the limited savings were not worth the worries over heightened scrutiny from the Internal Revenue Service involving future audits and federal offsets of subsidy payments.
The special obligation bonds are rated AA by Standard & Poor’s and Aa2 by Moody’s Investors Service. The state, which does not issue direct general obligation bonds, carries top issuer credit ratings from both agencies.
Gov. Chet Culver won legislative support for the $750 million program, promoting it as a means to create jobs by funding shovel-ready water, sewer, and other projects and rebuild infrastructure damaged by severe floods and storms in 2008.
The bonds are secured by gaming revenue and carry a backup pledge of liquor taxes. The secondary pledge is needed as voters weigh in on the continuation of state gaming every eight years. The bonds also carry a moral obligation pledge from the state to cover any shortage in the debt service reserve fund in the event that pledged revenues fall short. Devin said the state is hoping to maintain the current ratings as the revenues provide five times coverage of debt service.
Iowa’s financial profile has not shown any material weakening. Culver announced last week that gross general fund receipts for August totaled $688 million, an increase of 1.8 % over last year. The state has not formally closed the books on fiscal 2010, but it expects reserves will be at $807 million. The state earlier this year adopted a $5.28 billion budget for fiscal 2011.
