Arizona, which last week won popular backing for its first tax increase in 10 years, is selling $449.3 million in lottery revenue bonds to help close a budget deficit that last year led to credit rating downgrades.
Arizona’s sale today comes six months after Moody’s Investors Service and Standard & Poor’s lowered the state’s debt rating by one level, citing the inability to rein in its fiscal deficit. S&P changed its ranking to AA-, the fourth highest level, and Moody’s lowered to one level lower, A1, before recalibrating it higher to Aa2. The lottery bonds are rated AA- by S&P and A1 by Moody’s.
Lawmakers are trying to close a $2.6 billion budget gap for the fiscal year that begins July 1, according to the state’s Joint Legislative Budget Committee. Proceeds from the issue of tax-exempt bonds backed by lottery revenue will go to the general fund to provide “budgetary relief,” Moody’s said.
“Considering the state of affairs in Arizona, this deal probably needs to come quite cheap to clear the market,” said Michael Pietronico, chief executive officer of New York-based Miller Tabak Asset Management. While “absolute yields are low, there’s going to be demand for the loan just because there’s so little tax-exempt paper out there.”
The total dollar volume of municipal debt scheduled to come to market in the next 30 days fell 31 percent last week to about $9 billion, the lowest since April 29, according to Bond Buyer 30 Day Visible Supply.
Flight to Safety
Investors are concerned that European leaders may fail to contain the continent’s fiscal crisis and are turning to the perceived safety of U.S. assets. Top-rated 10-year tax-exempt yields held at 3.11 percent yesterday, the lowest since March 24. Yields on comparable taxable debt fell 1 basis point from May 21 to 4.51 percent yesterday, the lowest since December, according to Bloomberg Fair Market Value data.
U.S. Treasury yields on 10-year debt traded near the lowest level in 12 months, touching 3.16 percent, according to BGCanter Market Data. It touched 3.1 percent May 21, the lowest since May 2009.
The low yield on Treasuries “leaves an investor with cash with very few options, therefore municipal yields tend to grind lower because the demand has picked up,” Pietronico said.
Arizona’s offering is the week’s fifth-biggest as states and municipalities bring $7.7 billion to market. The securities will mature serially from 2013 through 2029.
The state’s lottery generated more than $7 billion in ticket sales since its inception in 1981 as of June 2009, according to the website.
Voters last week passed a tax increase for the first time in 10 years, adopting a temporary one-cent sales-tax boost aimed at raising as much as $1 billion a year to reduce the budget gap. The vote for the passage will raise the state’s portion of sales taxes to 6.6 percent, from 5.6 percent, for three years.
The state’s lottery bonds may provide fiscal relief, but they’re not a permanent solution, said Treasurer Dean Martin. Lawmakers should make structural changes instead of “one-time” cash infusions, he said in a telephone interview from Phoenix.
“It would be better to find a permanent solution, reduce spending by $400 million rather than doing the sale,” Martin said. “We’re still going to have a problem next year, you can’t sell the lottery twice.”
Martin is running for governor in Arizona’s Republican primary elections.
Arizona’s lottery, extended this year by its Legislature, generated revenue from ticket sales of $484.5 million in fiscal 2009, a 2.5 percent increase from the prior period, according to the agency. Sales have grown 4.8 percent on average from 1995 through 2009, Moody’s said, which has a negative outlook on the state.
The lottery is projected to generate about $166 million in pledged revenue in fiscal 2013, providing coverage of more than four times maximum annual debt service of $40.4 million, Moody’s said.
The Arizona Department of Administration, which is issuing the bonds, did not return phone calls yesterday.
Following are descriptions of pending sales of municipal debt in the U.S.:
SAN FRANCISCO, whose population has grown 12 percent in the past 20 years according the U.S. Census Bureau, plans to offer $240.7 million in wastewater revenue bonds through the public utilities commission in a competitive deal tomorrow. The issue will be separated into $192.4 million of Build America Bonds and $48.3 million in tax-exempts. Proceeds will go toward a sewer- system improvement program and refunding notes previously issued for those capital improvements. The securities are rated the fourth-highest level, at Aa3 by Moody’s and AA- by S&P. (Added May 25)
MONTGOMERY COUNTY, the home of Bryn Mawr College outside Philadelphia, plans to sell $313.8 million in tax-exempt mortgage revenue bonds through its Industrial Development Authority as soon as next week. Income from the sale will finance the building of a hospital on a former golf course. The securities, marketed by Goldman Sachs Group Inc., will mature serially from 2013 through 2020 and in 2025, 2030 and 2038. (Updated May 25)
MOUNT SINAI HOSPITAL, ranked 19th best medical center in the U.S. for 2010 by U.S. News and World Report, plans to offer $336.8 million in tax-exempts as soon as this week through the New York Dormitory Authority. The debt will be backed by a dedicated stream of hospital revenue with proceeds going to refunding outstanding debt from 2000. The securities, with the bulk maturing in 2026, are rated the sixth-highest level by Moody’s and Fitch at A2 and A respectively. (Added May 24)