Earlier this month, the Georgia State Financing and Investment Commission (GSFIC) sold the state’s first slate of bonds in fiscal year 2011. This week we will look at bonds and summarize the recent bond sale.
The state is constitutionally not allowed to run a deficit (the appropriations bill must be lower or equal to the revenue estimate the governor sets). Agencies are not permitted to expend more than what they are appropriated. They are also barred from entering into any contracts that extend more than a year (in other words, state agencies cannot obligate the General Assembly to appropriate money).
The state, though, can incur debt. While it is not uncommon to hear “debt” and “deficit” used interchangeably, the concepts are different. The state can borrow money through the issue of bonds, and Georgia State Finance and Investment Commission is authorized to sell bonds on behalf of the state. These are, of course, repaid within a preset number of years.
There are few restrictions on what bonds can be used for. Bonds cannot be sold to pay for operations, and any capital projects paid for with bonds must be located on state-owned land. Bonds are typically amortized over either five, 10 or 20 years, depending on the size and nature of the project they are funding.
Interest rate depends on rating
These bonds are backed by the full faith, credit and taxing authority of the state of Georgia. Georgia currently has a Triple A bond rating, which means the three credit rating agencies (Moody’s, Fitch and Standard and Poor’s) each gave Georgia its highest rating for financial soundness. This rating was reaffirmed last month, and Georgia is one of only seven states to have this high rating. The triple-A rating allows Georgia to borrow at lower interest rates because we are a more secure investment to bond holders.
The state of Georgia is permitted by law to sell bonds to the extent that the debt service does not exceed 10 percent of total revenue receipts.
Bond payments are required statutorily, so even if we can’t pay any other bill, we will pay our debt service first. Georgia follows a Debt
Management Plan which tracks Georgia borrowing and ratios of debt projected out five years. Georgia’s present debt to revenue ratio is 8.4 percent. You can view Georgia’s Debt Management Plan at www.gsfic.ga.gov. Click on “Financing and Investment Division” and then “Forms and Publications”.
October bond sale
At the most recent bond sale, GSFIC sold $653,925,000 in new project funding bonds. Because of our favorable bond rating, GSFIC was able to secure interest rates that were extremely low. The five year true interest cost was 0.97 percent, and the 20-year blended, net true interest cost was 2.14 percent. Both of these rates are historic lows. These rates translate into an annual savings of over $15 million compared to what had been budgeted.
The bonds sold this month were heavily tilted toward education projects. Included in this sale were over $160 million in bonds for Board of Regents projects, over $98 million in bonds for projects at technical colleges, and nearly $238 million in bonds for K-12 school projects.
The state still has $785 million in bonds that have been authorized by the Legislature but have not yet been sold. The next bond sale will likely be next spring.
Georgia resells previous bonds to get lower rate but not today
GSFIC postponed selling $321 million in General Obligation Refunding Bonds due to the high volume of similar bonds sold. This high volume required an increase beyond what the state was willing to pay out. The purpose of these Refunding Bonds is to issue new bonds which are used to pay off the old bonds (which were at a higher interest rate) in order to achieve lower debt service payments. The slightly higher rates available this month were just enough to move the Refunding Bonds out of the Commission’s target savings range. GSFIC is closely monitoring the market to determine when they might be able to offer those bonds for sale and achieve at least the minimum target level of savings.
Ending note: Georgia has the lowest debt per capita of any state in the nation.
I may be reached at
234 State Capitol, Atlanta, GA 30334
(404) 656-5038 (phone)
(404) 657-7094 (fax)
E-mail at Jack.Hill@senate.ga.gov
Or call toll-free at
1-800-367-3334 day or night
Reidsville office: (912) 557-3811