Record Arkansas Sale Shows 1933 Taint Buried: Muni Deals

Arkansas, which defaulted on road bonds during the Depression and became the only state to cost investors since 1900, will sell $495 million of general obligations this week to finance highway construction.

After the 1933 debacle and a 1951 issue, Arkansas didn’t return to the tax-exempt market to finance highways until 2000. This week’s sale will be the state’s biggest municipal offering since at least 1990.

“We have eased our way back into bond financing for highway projects,” said Randy Ort, a state highway department spokesman in Little Rock, the capital. “By doing relatively restricted projects for relatively short durations, we’re obviously winning the people’s trust back.”

The offering will kick off Arkansas’s $1.8 billion plan to expand and add highways in 19 areas, Ort said. Voters in November approved a temporary 0.5 percentage point increase in the state sales tax, to 6.5 percent, to help fund the 10-year initiative. The extra levy expires in 2023.

Arkansas’s Depression-era default occurred after it assumed responsibility for $54.8 million of securities sold by road districts in the 1920s, adding the obligations to its highway debt. The legislature sought to refinance with lower-yielding bonds backed by the state’s pledge instead of tolls and fuel taxes, leading investors to object and the subsequent default.

Bonds Burned

In 1972, the state held a bond-burning ceremony after it made the last payment on a 1941 issue that restructured the Depression-era securities, Ort said.

The default’s effects lingered for decades as Arkansas went from among the most-indebted states in the 1930s to 46th in a 2010 report from Moody’s Investors Service. Issuers in Arkansas have borrowed just $1.3 billion this year, data compiled by Bloomberg show.

This week’s issue, which matures over 10 years, is backed by a general-obligation pledge to give investors “greater security,” Ort said, even though it will be funded by the sales-tax increase.

The road improvements will ease travel throughout the state with a goal of promoting economic development and tourism, Ort said. Voters approved borrowing of as much as $1.3 billion for the projects, though there is a “strong possibility” no additional bond sales will occur if revenue is available to pay for the work, he said.

High Marks

Moody’s grades the debt Aa1, its second-highest level. The New York-based company credited the state’s low debt ratio and “conservatively managed financial operations.”

Governments are borrowing with benchmark muni yields at the highest level since April 2011 after individuals pulled $24.5 billion from muni-focused mutual funds in the 15 weeks through Sept. 4, Lipper US Fund Flows data show.

Arkansas’s offering is one of the $5.9 billion of long-term muni issues to be sold this week, up from $1.5 billion last week, data compiled by Bloomberg show. This week’s deals include revenue bonds from Catholic Health Services of Long Island in New York and Miami-Dade County, Florida.

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