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Georgias capital outlay bonds
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Last week we discussed the process in place to ensure that state bonds are issued in a disciplined manner that doesn’t overspend but still meets our infrastructure needs. This includes constitutional limits on the amount that can be borrowed as well as the restriction against bonding for operations or “short-term” needs.

This week we will talk about the need for capital outlay bonds.

Where bond money goes

If you remember from last week’s column, the debt management plan discussed last week assumed that $800 million in principal would be issued in FY2012 for new bonds. Part of the reason the plan was set at this level is due to the fact that we are projected to retire approximately $800 million in previously issued bonds. In a sense, there is a revolving cycle of funding infrastructure needs. This changed in FY12 when only $675 million in principal was authorized for bonds that worked out to approximately $72.5 million in one year annual debt service.

This is how the bonds were allocated by area:

K-12 Education - ($232 million or 33 percent of FY12 bonds) - Over a third of issued bonds went for K-12 needs. These bonds covered the purchase of school construction and repairs, classroom equipment and buses. Full-time equivalents (FTEs) have grown over 15 percent in the past 10 years and school population now exceeds 1.6 million children but these trends are slowing.

Regents and Technical Colleges - ($234 million or 34 percent in FY2012) - Higher Education infrastructure costs make up another third of the FY12 bond package. These bonds do not include dormitories, parking decks or other facilities that are funded through a different class of bonds that uses the income brought in to pay off the loan. Examples of higher education bonds in FY12 include construction of classroom buildings, repairs and renovations, equipment, etc.

Regents and Technical College System bonds are primarily chosen from a priority list created by these agencies (A link to the regents’ priority list can be found below). This priority list is important to understand because some may think that these bond requests are not vetted for necessity.

Since 2001 both the university system and technical school system have seen an increase of over 50 percent in the number of full time equivalents enrolled. According to Community College Week Magazine, half of Georgia’s technical colleges were ranked among the nation’s fastest growing two-year colleges. Consistently, we hear that higher education is a key to attracting businesses that will create jobs. Providing the infrastructure to train these future leaders and workers is a key.

Harbor Deepening and Water Supply ($113 million or 17 percent in FY2012) - Two big concerns the state has is the continuing success of our ports in Savannah and the preservation of our drinking water. To this end, bonds were authorized to provide $32 million of state money for the Savannah harbor deepening project. This year’s state portion of the funds needed and will hopefully be matched by several hundred dollars from the federal government. Projects for the construction of reservoirs as well as contributions for water and sewer revolving loans accounted for $80 million of bonds.

Other ($97 million or 14 percent in FY2012) - Other agency bonds accounted for the remainder of the bond package. These projects included the replacement of 200 law enforcement vehicles, repairs to prisons and mental hospitals and rail line bonds to facilitate trade, among other projects.

Even states with low bond ratings are borrowing less

The current economic climate has created an interesting phenomenon in the bond market. The total value of municipal bonds, issued nationwide has been steadily dropping, and interest rates are sinking into record lows.

One of the investor concerns over the past few years has been safety of their principal investment, and they’ve been willing to accept lower yields in exchange for safety.  These bonds are also usually tax exempt. Even states such as California with poor bond ratings have realized substantial savings from the current market. California plunged into a hungry market this week with its first general obligation bond sale of the year, grabbing yields far below its most recent sale last year.

California this summer sold $2.39 billion of GO bonds, with yields of 1.61 percent on five-year maturities, 3.17 percent on 10-year bonds and 4.8 percent on bonds maturing in 30 years. Those yields were on average 93 basis points lower than last November’s 2.66 percent for five-year maturities, 4.23 percent for 10-year bonds and 5.5 percent for 30-year debt. The deal included a $1.109 billion refunding piece that saved the state $105 million in present-value terms.

Next week: More on Georgia’s relative borrowing costs and low construction costs
Regents priority list link:

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