May 3 (Bloomberg) -- Ohio Governor John Kasich faces a $500 million hole in the budget he signed 10 months ago as a lawsuit imperils a plan to sell $1.4 billion of bonds to promote job growth.
The legal tussle revolves around JobsOhio, a private, non-profit corporation the Republican governor created last year to spur economic development. The group’s planned sale of taxable bonds backed by profits from the state’s wholesale liquor system has yet to take place, even though Ohio allocated $500 million of the proceeds to balance the current budget.
Two Democratic lawmakers and a Columbus nonprofit group challenged JobsOhio on the grounds it violates the state constitution by having public dollars invested in a private entity. JobsOhio said it may proceed with the sale anyway. The threat posed by the lawsuit would boost the deal’s cost, said Marc Gross, a money manager at RS Investments in New York.
“It’s hard to invest when you don’t know what the playing field is,” Gross, who oversees $3 billion in fixed-income securities, said in an interview. “If you’re making up the rules as you go, it’s very difficult to invest.”
If the proceeds aren’t available by the June 30 end of the fiscal year, Ohio will take steps such as tapping reserves to balance the budget, said Tim Keen, state budget director. Kasich, who has said that private industry can move more quickly than government in creating jobs, also has sold state prisons and is reviewing whether to sell or lease the Ohio turnpike.
Ohio is among 30 states that have projected or addressed deficits totaling $49 billion for fiscal 2013 after closing gaps totaling about $540 billion since 2009, according to the Center on Budget and Policy Priorities, a Washington nonprofit focused on issues affecting lower-income Americans.
A state appellate court is deciding whether the parties challenging JobsOhio have the legal right to sue. There is no timetable for a ruling.
“If the issuance of the bonds goes forward, it will be a debacle” if JobsOhio is found unconstitutional, Michael J. Skindell, a state senator; Dennis Murray, a representative; and Victoria Ullmann, a lawyer for ProgressOhio, the nonprofit opposing the plan, wrote in a court filing.
JobsOhio plans to sell the bonds in the corporate market and will go ahead with the borrowing when conditions are favorable, even if the suit hasn’t been settled, Laura Jones, a spokeswoman in Columbus, said in an interview.
“We would prefer that we didn’t have the lawsuit pending, but ultimately we’re going to move when we feel the time is right,” Jones said.
The group has selected bankers for the deal, though the issue doesn’t have a bond rating, Jones said in an e-mail. The final maturity would be no longer than 25 years, the duration of the agreement on the transfer of liquor profits, she said.
Investment-grade U.S. corporate-bond yields set a record low of about 3.37 percent last month as the growing economy helped borrowers make debt payments.
The deal would appeal to investors in part because liquor profits back the bonds, said Gross of RS.
He compared the sale with Build America Bonds, taxable municipal securities created in President Barack Obama’s 2009 economic stimulus program. Local governments sold about $188 billion of the debt before the program expired at the end of 2010. The average Build America yields about 4.64 percent, according to a Wells Fargo Index.
While Ohio doesn’t have government-run liquor stores, it buys and distributes alcohol to retailers. Wholesale profits in fiscal 2011 were $237 million, up from $229 million in 2010 and $224 million in 2009, according to the Ohio Commerce Department.
Payments to Ohio
JobsOhio agreed to pay the state $500 million for the transfer of liquor profits, an estimated $750 million to retire debt backed by the liquor money and $150 million for economic projects, according to Keen.
The state anticipates about $100 million will be available yearly to boost employment. Kasich credits JobsOhio with helping create almost 59,600 jobs in the year through March. The state lost 556,700 jobs from 2000 to 2010, according to federal data. Ohio’s jobless rate was 7.5 percent in March, compared with 8.2 percent nationally.
“It’s bizarre to me that there’s even a court case going on,” Kasich, who took office in January 2011, told reporters April 26 in Columbus. “You want to go back to doom and gloom?”
There must be accountability and transparency with the use of public funds in job creation that JobsOhio, as a private corporation, doesn’t provide, said Brian Rothenberg, executive director of ProgressOhio.
“This could turn very easily into a corporate-welfare program that doesn’t necessarily yield the jobs that they say it does,” Rothenberg said in a phone interview.
Ohio had its credit outlook raised to stable from negative in March by Moody’s Investors Service, which cited an improving financial position and a stabilizing economy. The potential shift in funds to keep the budget balanced if the bond sale is delayed was considered, Baye Larsen, an analyst in New York, said by phone. Moody’s also affirmed its Aa1 rating, second-highest, on $7.8 billion of general-obligation debt.
Ohio municipal debt has earned 15 percent since the start of 2011, beating the 14.2 percent increase by the $3.7 trillion municipal market, according to Standard & Poor’s data.
Tax receipts through March were running $265.4 million, or 2 percent, ahead of projections, and the state has $246.9 million in its rainy-day fund, according to the Ohio Office of Budget and Management.
The largest bond sale by Ohio issuers was about $5.5 billion in tax-exempt securities in 2007 by the Buckeye Tobacco Settlement Financing Authority, according to the office.
Following are pending sales:
CHICAGO plans to sell $435 million in revenue bonds this month to pay for improvements and extensions to its water system in the first debt issuance for the century-old structure since user rates doubled in November. The proceeds will also be used to buy back debt, according to an offering document. (Added May 3).
ILLINOIS is set to issue $375 million of taxable sales-tax bonds to help finance capital projects, John Sinsheimer, the state’s direct of capital markets, said in an interview. KeyBanc Capital Markets is the underwriter. Fitch Ratings rates the deal AA+, second-highest. (Updated May 3).
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