As Virginia's public colleges and universities navigate through the negative effects of the coronavirus pandemic, state leaders plan to use “scoop-and-toss” deals to provide them fiscal relief over two years.
The bond refinancings are expected to save the state's 16 public colleges and universities about $300 million by deferring debt service payments, according to Aubrey Layne, secretary of finance in Gov. Ralph Northam’s administration.
"We specifically want to give them some relief the next 24 months until they figure out how to deal with COVID-19," Layne said in an interview Tuesday. "We did not want to cut any [state] funding but we knew they would be impacted."
Virginia recently estimated that revenues supporting the state budget will come in $2.7 billion less than anticipated over fiscal 2021 and 2022 due to pandemic-related spending and other unanticipated expenses.
The Democratic-led General Assembly is currently in a special session reworking the budget. Layne said no cuts have been proposed to the higher education spending plan.
Top lawmakers support the refinancing plan, although a portion of it must be approved by the legislature next year, he added.
"What we're basically doing is deferring payments for the next 24 months and adding it to the end of the participants' pool bonds [maturity schedule], and because of low interest rates and the time value of money it doesn't cost anything significantly," Layne said. "This spreads out $300 million that they will have to pay, but 20 years into the future."
Many Virginia colleges and universities have seen a decline in revenue traditionally used for bond payments, according to state officials. They are also dealing with uncertainty regarding in-person learning, and some are unsure when or how students will return to campus.
Under the restructuring plan, the higher ed institutions will make no principal payments on their bonds through fiscal 2023.
The deals will begin coming to market this year and are expected to cost the state less than $10 million to do, Layne said.
He also said the plan to aid higher ed institutions was discussed with Fitch Ratings, Moody's Investors Service and S&P Global Ratings to ensure that it wouldn't hurt the state's triple-A ratings.
Financial advisors and rating agencies usually take a dim view of using scoop-and-toss because it tends to be misused by some issuers that have neglected their finances.
Virginia's plan is acceptable given the circumstances, said Lisa Washburn, chief credit officer and managing director at Municipal Market Analytics.
By Virginia "leveraging its rating to allow hard-hit higher education institutions the ability to refinance their debt at today’s extraordinarily low rates isn’t a bad idea given the impact the pandemic is having on their revenue streams," Washburn said. "Refinancing debt for cash-flow relief is occurring pretty frequently these days in both the public and direct loan markets."
In more typical times, she said habitual scoop-and-toss financings are viewed as a sign of a deteriorating fiscal position.
"Given the abruptness, breadth, and hopefully temporary nature of the pandemic’s impact on revenues it seems a reasonable tool to consider deploying," Washburn said.
Gov. Northam, a Democrat and pediatric neurologist, announced the finance plan for the state's colleges and universities along with several state officials, including Layne, at George Mason University's Fairfax campus Sept. 22.
The next day, Northam and his wife Pamela were notified that a staffer in the governor's mansion tested positive for the virus that causes COVID-19. Northam and his wife tested positive Sept. 24.
The governor reported Sept. 25 that he was asymptomatic while Mrs. Northam was experiencing mild symptoms.
“As I’ve been reminding Virginians throughout this crisis, COVID-19 is very real and very contagious,” Northam said in a statement. “The safety and health of our staff and close contacts is of utmost importance to Pam and me, and we are working closely with the Department of Health to ensure that everyone is well taken care of."
Layne said Tuesday that due to his proximity to the governor he is in quarantine at home, awaiting test results.
The refinancing plan, he said, is designed to provide colleges and universities with fiscal relief, though the early impacts of COVID-19 on campuses have been better than anticipated, so far.
Some institutions have seen between 3% and 4% attrition rates because students haven't returned for the fall semester, and some colleges have been forced to shift to virtual learning because of the number of positive tests.
Layne said more will be known about the virus' impact on higher education in January when the legislative session begins. However, he said, "I don't think anybody believes the spring semester is going to be better either."
Under Virginia's plan, two types of debt will be refinanced using scoop-and-toss deals.
In the first two deals, bonds will be issued under the state’s 9(d) sale program, which will refinance debt issued by the Virginia College Building Authority for capital projects. The bonds are secured by college fees and other revenues, and do not require legislative approval because the debt is not backed by Virginia's full faith and credit.
In the 9(d) program, $96.3 million of bonds will be refinanced this year and $97.9 million will be refinanced next year, for a total of $194.2 million.
In separate deals, general obligation bonds issued under a 9(c) sale program by the Treasury Board of Virginia will be refinanced. Because the state's full faith and credit and general revenues are pledged to these bonds, the deals must be approved by a two-thirds vote of both chambers in the General Assembly.
Under 9(c), the state plans to refinance $56.2 million in the first year and $51.9 million in the second year, for a total of $108.1 million. Lawmakers will vote on this program during the regular session that begins Jan. 13.
To project the estimated savings of the restructurings, Layne said the state worked with consultants to develop a model that considers Washington, D.C.'s monetary policy on rates, and then applied a 2.5% interest rate to the refinanced bonds.
"The cost is expected to be a little less than $10 million in present value terms," he said.
Virginia isn't the only issuer in the Southeast region to use scoop and toss for cash-flow relief.
In August, the Lexington-Fayette Urban County Government Public Facilities Corp. in Kentucky sold $32 million of taxable refunding bonds in the government's first-ever scoop-and-toss deal, to prevent a near-term default.
The bonds restructured three years of debt issued in 2018 to help finance a renovation of the Lexington Convention Center and the Rupp Arena, where revenues from sporting, convention and entertainment events declined by 90% due to cancellations and postponements amid the pandemic.
At the time, Moody's said the Lexington deal was an example of the credit-positive effect that active management, either by an issuer itself or related parent government, can have on bonds secured by declining revenue due to an event such as the coronavirus-induced economic downturn.
