States Improving Revenue Seize Gift Unseen Since Clinton Era: Muni Credit
Like homeowners refinancing their mortgages at the lowest interest rates since 1971, U.S. states and municipalities are slashing debt-service costs by selling new securities to replace costlier borrowings from past years.
Interest rates on 30-year top-rated tax-exempt bonds last week were close to the lowest level since 1991 at 3.88 percent, according to Bloomberg Fair Value index data. The yields followed the direction of 30-year Treasuries, which are used as a benchmark for home-lending rates.
Lower yields are helping states and localities cut borrowing costs as they marked their seventh-straight quarter of revenue growth over the previous year, the U.S. Census Bureau said last week. The last time governments enjoyed such an extended combination of falling interest rates and rising revenue was from June 1996 to September 1998, when Bill Clinton was in the White House.
“Especially in times like these where the budgets are so strained, you don’t want to miss an opportunity to reduce your debt-service costs,” Chris Mier, a managing director at Loop Capital Markets LLC in Chicago, said in a telephone interview.
The increase in municipal refunding follows U.S. mortgage rates plunging to the lowest level in Freddie Mac’s records after the Federal Reserve on Sept. 21 said it would buy long- term Treasuries. A Mortgage Bankers Association index of refinancings rose 11 percent in the week ended Sept. 23.
From April 1996 to September 1998, when the U.S. economy was growing by about 4 percent annually, state and local revenue increased for 10 consecutive quarters year-over-year. Yields on top-rated municipal bonds maturing in 30 years fell to 4.78 percent from 5.77 percent in the period, according to Bloomberg Fair Value data.
Municipalities have refinanced debt, reduced employee payrolls and cut capital projects to balance budgets. States have faced budget deficits totaling $511 billion in the past four years, data from the National Conference of State Legislatures show.
California saved $152 million when it refinanced $1.1 billion of general-obligation debt on Sept. 20. Municipalities refunded $36 billion from July through September, the most in a third-quarter since 2008, according to data compiled by Bloomberg.
In an effort to capture the lower borrowing costs, Oklahoma Turnpike Authority, the second-biggest U.S. highway agency by miles, plans to refund $521.8 million Oct. 5 for an estimated $20 million of savings, Wendy Smith, the authority’s chief financial officer, said in a telephone interview from Oklahoma City.
The projected savings are twice what the authority spent on turnpike maintenance in the first six months of 2011, according to bond documents.
The securities are rated Aa3, Moody’s Investors Service’s fourth-highest grade. The offering will convert variable-rate debt into fixed-rate bonds and cover the $51 million estimated cost of terminating two swaps, Smith said.
“We have $530 million worth of variable rate debt --that’s about 54 percent of our debt -- and we’d like to get it down closer to 30 percent,” she said.
The authority has a total of five derivative contracts with Goldman Sachs Group Inc., JPMorgan Chase & Co. and UBS AG. The five swaps have a negative mark-to-market value of $127.5 million, according to a Moody’s report. The agency wants to exit two of the swaps and the banks will bid against each other on Oct. 4 with the turnpike authority selecting the lowest termination fees, Smith said.
The agency projects it will collect $229 million of toll revenue in 2011, increasing each year to $271.5 million in 2020, according to the preliminary official statement.
Following is a description of a pending sale of municipal Debt:
PALM BEACH COUNTY SOLID WASTE AUTHORITY, which provides solid waste and recycling services to 1.4 million residents and businesses in the county, plans to sell $600 million of revenue bonds as soon as this week to refund debt. The bonds are rated AA+, Standard & Poor’s second-highest grade. Citigroup Inc. will lead a syndicate of banks on the transaction. (Added Oct. 3)
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