Overview of State Bond
Financing Programs
Laura Lockwood-McCall
Director, Debt Management Division
Office of the Oregon State Treasurer
October 27, 2006
Introduction
 Definitions
 U.S. Debt Market
 General Obligation Credits and Ratings
 Oregon’s Bonding Process
 Mechanics of a Bond Sale
 Oregon’s Long-term Debt Trends
 State Debt Ratio Comparisons
1
What is a bond issue?
 The process of issuing bonds is
the process of borrowing money
 Evidence of the issuer’s obligation
to repay its debt
 Pledge of general fund or
specified resource
 Specified schedule of principal
and interest payments
2
Why do governments issue bonds?
 Major source of funding for a
jurisdiction’s long-term capital needs
 Allows assets to be acquired as
needed rather than when enough cash
has been saved
 Spreads costs of a capital asset over
time to all those who benefit from it
 Short-term borrowings for smoothing
out cash flow imbalances, not as a
way to balance the budget!
3
What types of projects are financed with tax-exempt bonds?
 Interest on state and local bonds
issued for “governmental
purpose” capital projects are
exempt from both federal and state
taxation
 Examples of public projects
include schools, roads, bridges,
city halls, court buildings, sewer
and water facilities
 Investors are willing to accept a
significantly lower interest rate due
to the double tax-exemption
offered
4
What is a private activity tax-exempt bond?
 Certain “private activity” projects or
programs that serve a larger public
purpose may also be issued on a taxexempt basis
 Examples include financing of
airports, ports, affordable housing,
first time homebuyer mortgages,
electric power generating facilities,
convention centers and sports
stadiums
 Qualified 501(c)(3) organizations can
also issue tax-exempt bonds for
projects such as educational, health
and cultural facilities (including
Willamette University!)
5
U.S. Bond Market
Outstanding Bond Market Debt
as of September 2005* ($Trillions)
Money Market
13.2%
Federal Agencies
10.3%
$2.5T
$3.2T
Asset Backed
7.8%
$1.9T
U.S. Corporate
20.2%
$5.0T
$2.2T
Municipal
Securities
9.0%
4.0T
$5.7T
Total: $24.7 Trillion
Treasury**
16.4%
Mortgage Related
23.3%
Source: Bond Market Association
* Figures may not add due to rounding
** Includes interest bearing marketable public debt only
6
U.S. Municipal Bond Market
Owners of U.S. Municipal Securities
as of June 30, 2005* ($ Billions)
Other**
7.9%
Prop. & Casualty
Insurance
13.2%
$168B
$281B
$815B
Commercial
Banks
7.0%
Closed-End Funds
4.2%
Total: $2.1 Trillion
$141B
$90B
$323B
$304B
Source: Bond Market Association
Money Mkts
*Figures may not add due to rounding
15.2%
** Includes non-financial corporations, state and local
government general funds & retirement funds, savings
institutions, life insurance companies, private pension funds,
brokers/dealers, etc.
Mutual Funds
14.3%
7
Households
34.6%
What is a bond credit rating?
 Credit ratings provide investors with an easily identifiable
way to assess the degree of risk in an issuer’s securities
 Three major firms in municipal market
 Standard and Poor’s
 Moody’s Investors Service
 Fitch Investors Service
 Different rating schemes, but same underlying theme:
 AAA for highest rated securities
 AA, A, BBB levels as perceived risk increases
 BBB- is below investment grade
8
What factors are considered by the credit rating agencies?
 General Obligation Bonds
 Financial performance of jurisdiction
 Governance Framework/Management Practices
 Debt burden
 Economic base
 Revenue Bond
 All of the above, plus
 Strength of specific revenue streams pledged
 Legal, financial agreements
 Rate covenants
9
Recent Oregon G.O. Bond Rating History
Moody’s
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Aa
Aa
Aa
Aa
Aa
Aa
Aa
Aa2
Aa2
Aa2
Aa2
Aa2
Aa2
Aa3
Aa3
Aa3
Aa3
(January)
(April)
(February)
S&P
Fitch
AAAAAAAAAAAAAA
AA
AA
AA
AA
AA
AA
AAAAAAAA-
AA
AA
AA
AA
AA
AA
AA
AA
AA
AA
AA
AA
AA
A+
A+
AAAA-
(September)
(October)
10
(September)
(February)
(April)
Legal Authority for State General Obligation Bond Programs
 Oregon Constitution provides authority to issue general obligation (“GO”) bonds
 Separate GO bond programs are created by constitutional amendments
approved by State voters
 The State unconditionally promises to pay debt service over the life of each
GO issue from any legally available revenues
 Debt limits linked to real market value (RMV) of property in the State
 e.g., Higher Education (XI-G) Bonds
 0.75% RMV = $ 2.48 B authorized
 Only $170 M in XI-G debt outstanding
 Numerous other GO bond authorizations, each with hefty debt limits
 More practical limits on outstanding debt established by State Debt Capacity
Advisory Commission (SDPAC)
 General Fund debt service as % of General Fund Revenues (5% max target)
11
Oregon’s Bond Authorization Process
 Oregon has disciplined debt
management policies and
procedures
State Debt Policy
Advisory
Commission
 Biennial budget process requires
legislative authorization for all
new bond issuances during a
biennium (“bond bill”)
 General obligation bonding
programs currently focused on
capital needs of higher education,
community colleges
Governor
Budget & Bonding
Proposal
 Revenue bond programs are
created by statute that authorizes
State agencies to pledge specific
revenue streams for debt
repayment
Legislature
Considers &
Approves Budget
& Bonding
Proposal
State Treasurer
Issues State Bonds
on behalf of State
Agencies
State Agencies
Manage Bond
Programs
 Appropriation credits generally
used for funding construction of
state prisons, other state office
capital needs
12
State of Oregon Bond Issuing Entities
Overview of Credits & Programs
Program
Amount
Outstanding
(MM)
Main Source of
Repayment
Use of Funds
Backup Source
of Repayment
Uninsured
Ratings1
Board of Higher
Education
$830
Higher education
facilities
User charges, student
building fees, gifts,
grants and legislative
appropriations
State general
obligation
M: Aa3
S: AAF: AA-
TANs
$148
State cash flow
management
All available revenues of
State from taxes not
otherwise pledged
NA
M: MIG1
State offices,
prisons, and
equipment
Rent payments by the
user State Agencies, via
legislative appropriation
NA
M: A1
S: A+
F: A+
Restore cash
balances during
2001 budget crisis
Legislative appropriation
NA
M: A1
S: A+
COPs
Appropriation Bonds
$1,040
$386
S: SP-1+
F: F1+
F: A+
____________________
(1) “M” indicates Moody’s, “S” indicates Standard and Poor’s and “F” indicates Fitch.
13
17
State of Oregon Bond Issuing Entities
Overview of Credits & Programs
Program
Lottery Bonds
Highway User Tax
Revenue Bonds
Amount
Outstanding
(MM)
$600
$529
Department of
Veterans’ Affairs
Bonds
$737
Single and MultiFamily Housing
Bonds
$1,497
Main Source of
Repayment
Use of Funds
Economic
development and
education
Lottery revenues after
prizes and operating
expenses;
Backup Source
of Repayment
Uninsured
Ratings1
Direct
appropriations
by Legislature
M: A1
Restore highways;
Taxes and fees on fuel
$1.5 bn remaining
and licenses, after
unused authorization certain expenses and
formulaic set-asides; 3x
coverage test
NA
M: Aa2/VMIG-1
Make subsidized
housing loans to
military veterans
Pass-thru of mortgage
payments
State General
Obligation
Finance mortgage
loans for low-tomoderate income
residents and
construction of low
rent housing
developements
Pass-thru of mortgage
payments
S: AAA
F: A+
S: AAA/AA+
F: AA/F-1+
S: Aa3/VMIG-1
M: AA-/A-1+
F: AA-/F-1+
Reserve
accounts / FHA
and other
insurance
proceeds from
mortgages / Lien
on properties
Single Family:
M: Aa2/VMIG-1
Multi-Family:
Varries deal-todeal
Other state agencies with active bond programs include Economic and Community Development Department, Department of Energy, Oregon Facilities
Authority, and Department of Environmental Quality.
____________________
(1) “M” indicates Moody’s, “S” indicates Standard and Poor’s and “F” indicates Fitch.
14
18
Considerations when Selling State of Oregon Bonds
Method of Sale
 Competitive vs. negotiated sale of bonds
 Size and complexity of transaction
 Market conditions
 Competitive sales make sense if:
 Frequent issuer with well-known credit
 Stable interest rate environment
 Negotiated sales make sense if:
 Infrequent issuer
 Dynamic interest rate environment
 Complex transactions involving enhanced premarketing efforts
15
Timing of Sales of State Bonds
 Authorization requirements
Major State Bond
Programs
 Program spending needs
COPs
 Federal tax law considerations
 State Treasurer’s office manages
overall state bond calendar
 Goal -- keeping in-state retail
interest high for each sale
reduces overall interest cost
183 M
Single Family
Mortgage Program
300 M
GO Bonds/Veterans
Mortgage Program
80 M
GO Bonds/Energy
Loans
68 M
138 M
ODOT Bonds
350 M
Multifamily Housing
Bonds
100 M
Total
16
$ 94 M
Lottery Bonds
GO Bonds/Higher
Education &
Community Colleges
 Helps state avoid pricing bonds
when other large transactions,
economic announcements are
impacting capital markets
Planned
Issuance through
6/30/07
$ 1,313 M
Who are the members of the financing team?
 Financial advisor
 Bond counsel
 Underwriter(s)
 Underwriters’ counsel
 Trustee
 Other consultants and
professionals
 And most important, the issuer!
17
What should an issuer look for in selecting the financing team?
 Expertise in municipal capital markets
 Understanding of jurisdiction’s objectives and needs
 Experience with similar types of securities
 Awareness of innovative financial methods which can reduce costs or
provide financial flexibility
 Ability to complete your financing on a timely basis
 You get what you pay for – lowest cost providers don’t always save you
money in the long run!
18
What types of documents are needed to publicly issue bonds?
 Official statement
 Bond resolution
 Trust indenture
 Notice of sale
 Bond purchase agreement
 Continuing disclosure agreement
 Tax certificate
19
How does the State ensure bonds are priced fairly in a negotiated sale?
 Financial advisors are hired who are independent of underwriters and are
knowledgeable about the bond pricing process
 Financial advisors monitor capital markets both prior to and after pricing to
confirm that bonds are sold to underwriters at market levels
 Comparable issues also in market
 Bond market benchmarks
20
Trends in Oregon Bond Issuance
• Historically, most general
obligation debt linked to selfsupporting Veteran’s
Mortgage Bonds
• Growing use of revenue
bonds to fund economic
development, highways,
mortgages for 1st time
homebuyers
• Recent State budget crisis led
to issuance of $450 M in
appropriation deficit bonds
and $2B in POBs in 2003
• On the horizon -- $1.9 B
authorization for ODOT
bridge and road
improvements
21
Trends in General Obligation Bond Issuance
History of Outstanding General Obligation Debt
$7
DVA Bonds
All Other GO Debt
Pension Obligation Bonds
$6
$5
$3
$2
$1
Fiscal Year as of June 30th
22
05
20
04
03
20
20
02
20
01
00
20
20
99
98
19
19
97
19
96
95
19
19
94
93
19
19
92
91
19
19
90
19
89
88
19
19
87
86
19
19
85
$0
19
In Billions
$4
Trends in Appropriation Credits Issuance
History of Outstanding Appropriation Credit
$1,400
Certificates of Participation
Appropriation Bonds
$1,200
Millions
$1,000
$800
$600
$400
$200
$0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Fis c a l Ye a r E n d in g Ju n e 3 0 t h
23
1999
2000
2001
2002
2003
2004
2005
Trends in Direct Revenue Bond Issuance
24
Calculation of Net Tax-Supported and General Fund Debt
State of Oregon
Comparison of Total Gross Debt, Net Tax-Supported Debt and General Fund Supported Debt
as of December 31, 2005 (all numbers to be updated subsequent to agency verification)
Type & Purpose
Total
Gross Debt
Outstanding
General Fund
Supported
Debt
Net
Tax-Supported Debt
General Obligation Bonds
General Fund Supported
General Purpose Bonds
Community College Bonds
Higher Education Facility (XI-G) Bonds
Pollution Control Bonds (85% of Total)
DAS Oregon Opportunity Bonds
DAS Pension Obligation Bonds (38% of Total)*
Total General Fund Supported
$0
2,675,000
170,163,993
33,528,250
192,605,000
791,904,800
$1,190,877,043
$0
2,675,000
170,163,993
33,528,250
192,605,000
791,904,800
$1,190,877,043
$0
2,675,000
170,163,993
33,528,250
192,605,000
791,904,800
$1,190,877,043
Fully Self-Supporting
State Highway Bonds
Veterans' Welfare Bonds
Higher Education Facility (XI-F) Bonds
Pollution Control Bonds (15% of Total)
Water Resources Bonds
Elderly & Disabled Housing Bonds
Alternate Energy Project Bonds
DAS Pension Obligation Bonds (62% of Total)*
Total Self-Supporting
$0
757,690,000
595,923,724
5,916,750
1,356,000
213,580,000
133,685,000
1,292,055,200
$3,000,206,674
$0
0
0
5,916,750
1,356,000
0
0
1,292,055,200
$1,299,327,950
$0
0
0
0
0
0
0
0
$0
Total General Obligation Bonds
$4,191,083,717
$2,490,204,993
$1,190,877,043
Revenue Bonds
Direct Revenue Bonds
Lottery Revenue Bond Program(s)**
Highway User Tax I Revenue Bonds
Highway User Tax II Revenue Bonds
Transportation Infrastructure Bank
Economic Development - Bond Bank
Single-Family & Multi-Family Housing
State Fair & Exposition Center Bonds
Total Direct Revenue Bonds
$600,555,000
174,500,000
355,085,000
0
186,335,000
1,520,641,073
0
$2,837,116,073
$600,555,000
174,500,000
355,085,000
0
0
0
0
$1,130,140,000
$0
0
0
0
0
0
0
$0
$683,185,401
738,324,836
98,510,785
$1,520,021,022
$0
0
0
$0
$0
0
0
$0
$1,040,030,000
385,865,000
$1,425,895,000
$1,040,030,000
385,865,000
$1,425,895,000
$1,040,030,000
385,865,000
$1,425,895,000
$5,046,239,993
$2,616,772,043
Conduit or Pass Through Revenue Bonds
Economic & Industrial Development
Oregon Facilities Authority
Multi-Family Housing Programs
Total Conduit or Pass Through Revenue Bonds
Appropriation Credits
Certificates of Participation (COP's)
Oregon Appropriation Bonds
Total Appropriation Credits
Total Gross Debt
$9,974,115,812
Total Debt - Less Conduit Revenue Bonds
$8,454,094,790
*To conform to rating agency methodologies Pension Obligation Bonds are considered net tax-supported debt.
** Rating agencies recognize that these programs are supported by a dedicated Lottery revenue source.
25
State Debt Comparisons
Recent Trends in Oregon's Net Tax Supported Debt per
Capita
$1,600
POB Bonds
Oregon
Median Among 50 States
$1,400
$6
06
1999
2000
2001
2002
2003
$7
03
$5
73
1998
$5
41
1997
$5
40
1996
$5
05
$4
46
$600
$4
22
$800
$7
01
$1,000
$4
31
Debt per Capita
$1,200
2004
2005
$400
$200
$0
Moody's Median Year
Source: Moody’s State Debt Medians Reports, 1996 - 2005
26
State Debt Comparisons
Recent Trends in Oregon's Net Tax Supported Debt
as a % of Personal Income
5.0%
4.5%
%
%
2002
2003
2.
4
2001
2.
2
%
%
2000
2.
3
1999
2.
1
%
1998
2.
2
%
2.
0
1997
1.
9
1996
2.0%
%
%
2.
1
2.5%
%
3.0%
2.
4
3.5%
2.
1
Debt as a % of Income
4.0%
%
POB Bonds
Oregon
Median Among 50 States
2004
2005
1.5%
1.0%
0.5%
0.0%
Moody's Median Year
Source: Moody’s 2003 State Debt Medians
27
Where can I get more information on Oregon municipal bonds?
 State Treasurer’s Office http://www.ost.state.or.us/divisions/DMD/index.htm
 Oregon Bond Calendar and Bond Index
 Oregon Bond Manual
 State Debt Policy Advisory Commission reports
 Municipal Debt Advisory Commission reports
 GFOA
http://www.gfoa.org/
 An Elected Official’s Guide to Debt Issuance
 An Elected Official’s Guide to Rating Agency Presentations
 OMFOA
http://www.omfoa.org/
 Annual spring conference
 Northwest Government Institute each fall
28