LOS ANGELES — Nevada will price $650 million in unemployment insurance revenue bonds on Oct. 29 to repay the federal government for outstanding balances.
Nevada, like more than 20 other states, ended up owing the federal government a significant amount for cash advances provided by the U.S. Department of Labor to pay unemployment insurance benefits after the state’s unemployment trust fund balances became depleted during the extended economic slow-down.
The state’s Department of Finance approved a $650 million issuance Thursday, about half of the up to $1.3 billion in tax-exempt and taxable bonds the state estimated it would price several months ago.
A combination of market conditions that bumped up anticipated interest rates too much on the taxable portion, and improved employment in the state, resulted in the smaller offering, said Nevada Treasurer Kate Marshall.
“We had the ability to issue bonds to repay the federal government and also to issue taxable bonds to build state reserves,” Marshall said. “We chose not to do the taxable bonds, because of market conditions.”
Nevada anticipates achieving 1% true interest costs on the short-term bonds expected to have a final maturity of 2017, said Mark Mathers, chief deputy treasurer.
Goldman Sachs and RBC Capital Markets are lead managers on the bonds.
“These are not going to be general obligation bonds, but revenue bonds,” Mathers said. “The transaction morphed into a more pure securitized revenue bond structure.”
Ratings aren’t in yet, but because the revenue bonds to be repaid from the tax on employers are not GO bonds, Mathers said the bonds might command triple-A ratings higher than the state’s double-A level GO bond ratings.
The state posted the highest unemployment rate in the nation during the recession, peaking at 14% in October 2010, as it was hit particularly badly by the housing crash. The state’s unemployment rate had dropped to 9.5% by August 2013, according to the treasurer’s office.
Although the state’s trust fund balance to pay unemployment insurance claims was well-funded at over $800 million prior to the Great Recession of 2008-2009, the severity and length of the recession caused Nevada’s Unemployment Compensation Fund to be depleted in the fourth quarter of 2009, state officials said.
The total amount of Nevada’s advances reached its peak at $855 million in the first quarter of 2012. Due in part to a rebound in employment in Nevada, the deficit has been reduced to approximately $525 million, according to Treasury officials.
The state has a busy bond calendar heading into the end of year and through 2014 a stark difference from the past several years when the focus was on refunding. This issuance also represents a change from previous years when the state capitalized on its double-A ratings to achieve savings through competitive, rather than negotiated offerings.
“We think we can get a better rate if the bonds are sold negotiated,” Marshall said of the decision. “It also offers more flexibility in the bond structure.”
The bonds are very short-term and we have a callable portion in the last quarter of the bonds, she said.
Issuing the tax-exempt bonds at 1% true interest represents a savings compared to repaying the cash advances at the federal government’s current interest rate on cash advances of 2.58%, according to the treasurer’s office. The federal government’s rate is also expected to rise over the next five years as rates rise from generational lows for U.S. Treasury rates.
If a state has an outstanding loan balance for greater than two consecutive calendar years, the federal government automatically begins to collect additional taxes from employers by increasing the federal unemployment tax rate by 0.30% every year that the loan is outstanding. The additional FUTA collections are applied directly to the outstanding loan principal. In addition, the federal government charges interest on the amount of the advance using a rate that is equivalent to the blended interest cost of outstanding U.S. Treasury debt. The interest rate most recently assessed to Nevada was 2.58%.
“We believe that moving forward to repay the federal government reduces the rates for the business community, stabilizes what we are paying for unemployment insurance and positions the state better in the event another recession occurs in the next three to five years,” Marshall said.
The state expects to use bond proceeds to repay the federal government by Nov. 9, avoiding an increase to the FUTA rate effective Jan. 1.
