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Overview of State Bond Financing Programs. Laura Lockwood-McCall Director, Debt Management Division Oregon State Treasury. Introduction. U.S. Debt Market The Sovereign State of Oregon Oregon’s Economic and Revenue Outlook State Biennial Budget and State Services
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Overview of State Bond Financing Programs Laura Lockwood-McCall Director, Debt Management Division Oregon State Treasury
Introduction • U.S. Debt Market • The Sovereign State of Oregon • Oregon’s Economic and Revenue Outlook • State Biennial Budget and State Services • General Obligation Credits and Ratings • Oregon’s Bonding Process • Long-term Debt Trends • State Debt Ratio Comparisons
U.S. Bond Market Outstanding Bond Market Debtas of September 2005* ($Trillions) $2.5T $3.2T $1.9T $5.0T $2.2T 4.0T $5.7T Total: $24.7 Trillion Source: Bond Market Association * Figures may not add due to rounding ** Includes interest bearing marketable public debt only
U.S. Municipal Bond Market Owners of Municipal Securitiesas of June 30, 2005* ($ Billions) $168B $281B $815B $141B $90B $323B Total: $2.1 Trillion $304B Source: Bond Market Association *Figures may not add due to rounding ** Includes non-financial corporations, state and local government general funds & retirement funds, savings institutions, life insurance companies, private pension funds, brokers/dealers, etc.
Washington Oregon Idaho Nevada California The State of Oregon Is a Sovereign Entity • Under the United States Constitution, the State is a sovereign entity that has given only limited powers to the federal government • The State was founded in 1859 and has its own Constitution • The State has the power to raise revenues, to borrow money, and to pay its expenditures independent of the federal government • $8.5 billion in debt outstanding as of 6/30/05 • Interest on Oregon bonds is generally exempt from federal, state taxes • State Treasurer is elected by statewide vote for a 4-year term • One of three constitutionally defined elected officers, charged with tending to the State’s finances • Based on dollar volume of transactions and assets under management, State Treasurer’s Office is one of the largest financial entities in Oregon • Responsible for managing the State's debt portfolio, including new borrowings • Serves as State’s Investment Officer, responsible for all State trust and general funds, including oversight of the State’s pension fund investments
Overview of Oregon’s Economy • Total Gross State Product in 2004: $128 billion • Increased by 111% from 1991to 2004 • Oregon’s economy has diversified away from resource-based industries into high-tech industries • High-tech products* constituted 6.2% of 2004 Gross State Product, versus 2.3% in 1991 • 2004 Population: 3.6 million • Growth driven by in-migration in past decade • 11th fastest growing state during the 1990s • Increase of 1.2% over the 2003 population, above the 1% annual growth rate since 2000. • Employment growth and personal income growth has returned, but not at 1990 levels • Exports are a growing part of the State’s economy • $11.2 billion of exports in 2004 • $5.7 billion of exports to Asia, 8th largest in the nation *Electronic and other electric equipment manufacturing Sources: Bureau of Economic Analysis, Bureau of the Census, Export.gov
Oregon’s Exports Have Grown Significantly • Since 1990, Oregon’s exports increased by a compound annual rate of 8.4% • Oregon’s exports have also diversified away from lumber and wood products to high-tech products Sources: National Trade Data Bank-The Export Connection; Export.gov.
Summary of Fiscal 2005–07 Legislatively Adopted Biennial Budget • Total legislatively-adopted biennial budget includes $42.367 billion in revenue from all sources, including (as % of budget) • General Fund Revenues (27.1%) • Federal Funds (19.9%) • Other Funds, including sales and use taxes, fees, interest earnings, and bond proceeds (51.2%) • Lottery Funds (1.8%) • General Fund revenues derived primarily from personal income taxes 7% 7% 81% Note: Legislative actions to increase revenues have been allocated to General Fund revenue categories
Scope of State of Oregon’s Budget and Services • The State provides a wide range of services to its citizens, including (as % of budget): • Education (55.7%) • Human Services (21.3%) • All Other Programs (7.2%) • Public Safety/Judicial (15.8%) • State Constitution requires a balanced budget • Five special sessions during 2001-03 biennium to balance budget to ever declining revenue forecasts • Improving budget picture at State level is offset by continued pressure for increased spending on education, prisons, health care • Bond rating upgrade may be contingent on restoration of GF reserves to pre-recession levels (at least 5% of GF revenues)
Taxable General Obligation Credits vs. Corporate Credits • Moody’s 2002 study illustrated the superior credit quality of municipal securities in comparison to “AAA” corporate bonds from 1970 - 2000 10 year default rates All General Obligation Bonds AAA Corporate Bonds 0.000% 0.675% • In 2003, Moody’s introduced in 2003 “Corporate Equivalent” Ratings for taxable municipal credits to illustrate their comparative strength versus corporate credits • Oregon’s $2.0 billion taxable Pension Obligation Bonds (POBs) received a corporate equivalent rating of “AAA” • POBs were listed on the Luxembourg Stock Exchange, with a large portion of overall bond issue sold to European investors • Oregon’s credit strengths are not shared by corporate credits: • Cannot file for bankruptcy or be acquired by another entity • Constitutional requirement to balance budget • Required transparency of financial results • Constitutional checks and balances
Recent Oregon G.O. Bond Rating History • Key Rating Agency Criteria for • General Obligation Bond Ratings • Economy • Budget • Debt Profile • Management
Legal Authority for General Obligation Bond Programs • Oregon Constitution provides the State with 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 • Limit on the amount of indebtedness authorized by voters is 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)
Oregon has disciplined debt management policies and procedures Biennial budget process requires legislative authorization for all new bond issuances during a biennium General obligation bonding programs currently focused on capital needs of higher education, community colleges Revenue bond programs are created by statute that authorizes State agencies to pledge specific revenue streams for debt repayment Appropriation credits generally used for funding construction of state prisons, other state office capital needs Oregon’s Bonding Process State Debt Policy Advisory Commission Governor Budget & Bonding Proposal Legislature Considers & Approves Budget & Bonding Proposal State Treasurer Issues State Bonds on behalf of State Agencies State Agencies Manage Bond Programs
Trends in Oregon Bond Issuance • Historically, most general obligation debt linked to self-supporting 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
State Debt Comparisons Source: Moody’s State Debt Medians Reports, 1996 - 2005
State Debt Comparisons Source: Moody’s 2003 State Debt Medians