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A look at state bond financing
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Previously, we discussed that the current interest rates in the financial markets for bonds, competitive construction costs and need for infrastructure in a growing state might be sound reasons to follow the state’s Debt Management Plan and increase the amount being bonded each year. We left off after beginning the discussion of how even states with less than stellar credit, like California, were getting incredibly low borrowing rates.

Proof of Georgia’s high standing in the bond market comes from the June reaffirmation of the state’s AAA bond rating and the historically low rates the state received in that bond sale: 0.93 percent for five-year bonds, 1.97 percent for 10-year bonds and 3.44 percent for 20 year bonds.

Of course over 85 percent of bonds normally sold are long-term 20 year bonds since most go for buildings and other long-term projects. Given California’s rates mentioned previously, 5.50 for 20-year bonds, Georgia has every reason to expect continued outstanding low borrowing rates.

If California is attractive for investors, Georgia’s offerings would be priced even stronger given our AAA debt rating compared to California’s lower rating. As noted by Alexander Anderson, a portfolio manager at Envision Capital Management in Los Angeles, “I don’t think the metrics of California have changed significantly; the state still has significant problems. I think the lack of issuance we have seen over the last year just makes these new issues more desirable for institutional buyers.  Big institutions have a lot of money to spend and they are willing to buy at really low yields.”

While rates are low now, analysts in the municipal bond market are already suggesting yields will increase as more states, cities and localities enter the market seeking to take advantage of the low rates. Again, now is the time to borrow.

Good value in construction today

The low cost to borrow is not limited to the financing portion of construction. I have learned bids on new K-12 school buildings are coming in at the $100-$130 psft. range for the typical school building. Depending on the size and extras wanted by local systems, costs had been running over $150 psft. prior to the recession. Not only is the cost of materials reaching new lows, but the lack of other construction projects is increasing the number of bidders on these projects and pushing costs down. Where previously there might be 10 or less interested bidders for projects, now there will be 40 or 50 bids submitted. Reports say that systems’ school construction projects are coming in under budget and on time.

Georgia State Financing and Investment Commission (GSFIC) staff reports that agencies projects are coming in on target in submitted bids and agencies are sometimes being allowed to add square footage to projects for the same funds. This is compared to the period before the recession where often projects had to be reduced in scope and size because of bids coming in higher than estimated. “This is the time to build,” they say.

Positive side effect: Jobs

The construction industry is another beneficiary of bond projects. In Georgia, we don’t believe in borrowing money to fuel job creation. But as we have seen, Georgia has a responsible process, a need for infrastructure and a position to borrow at lower costs.

While we are not borrowing just to try to stimulate the economy, jobs are a positive side effect of bond issuance. If you remember, the key to Georgia’s recovering from the recession of 2001-2003 was the strength of our construction industry. With a glut of homes and office space coupled with the lack of financing, this industry hasn’t fared well this time around.

In 2007 construction employment accounted for approximately 220,000 jobs. By 2009, this had fallen to about 160,000. This sector seems to have hit the bottom at the early part of the year at 130,000 jobs, a 40 percent decline from 2007. In the southeast, Georgia trails behind only Florida in construction employment loss.

The industry is improving but very slowly and far behind other sectors such as hospitality, business services and other professional industries. Any jobs added to the construction industry would certainly enhance our efforts in rebuilding our state.

Five years ago, materials costs and labor shortages along with less competition pushed construction costs upward and yet Georgia still bonded around $1 billion yearly with about the same size state budget as FY12 and 13. Today, materials are at the lowest level in a decade or so, competition between construction companies has pushed prices downward and Georgia is able to borrow at historic low rates.

As a growing state with a bright future and 1.6 million new citizens over ten years ago, Georgia should be wisely investing in infrastructure at levels the state can afford and are in fact expected by bond underwriters.

I may be reached at
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